It's said that analysts are good at drawing straight lines that always go up and to the right, and one Wall Street pro seems to be proving the point. Pivotal Research just raised its price target on Amazon (AMZN -2.56%) to a street-high of $4,500 per share. That's 15% above its previous current $3,900 target, but 43% higher than where the e-commerce giant closed on Wednesday.

Yet, it's not a claim made without basis. Other analysts are missing the crux of Amazon's potential and severely undervaluing its stock because of it, argues the note.

Man pointing up beside wooden arrow

Image source: Getty Images.

Pivotal Research analyst Michael Levine argues the market misunderstands the potential of Amazon's advertising business.

Although ads contribute only 5% of Amazon's total revenue, their impact on operating profit margins is much greater when you remove Amazon Web Services (AWS) from the equation. At $2.1 billion, cloud services represent the vast bulk of Amazon's total operating income.

Put another way, if advertising was viewed as a stand-alone business, it would represent "well north" of 300% of Amazon's estimated non-AWS earnings before interest and taxes for 2020. He says that means there is "massive upside" to Amazon's earnings estimates for fiscal year 2024.

Considering Amazon has already generated around $8 billion in net ad revenue in 2020, and eMarketer forecasts it will grow to $13 billion for the full year (up from $10 billion last year), an argument could be made the analyst isn't bullish enough. Last year, Pivotal thought Amazon's ad revenue would hit $38 billion by 2023, though that was pre-pandemic. 

Amazon is the third largest ad platform behind Facebook and Google. It might not catch them any time soon, but this is a large opportunity that has yet to be fully tapped.