Reaching a $1 trillion valuation is a big deal, but it's not the end for most companies. As Apple has proven, there's more beyond that threshold. However, when Wall Street firms project 68% upside from a trillion-dollar stock's current price, that's a big deal. Combine that with the fact that this stock is already up more than 60% in 2023, and it becomes very intriguing.
The stock I'm talking about is none other than Amazon (AMZN 2.34%), which Redburn Partners has given a 12-month $230 price target as of August 11. While that indicates 68% upside, the Wall Street average projection is $175, indicating around 28% upside. So regardless of who sets the price target, the consensus is pretty clear on Amazon's stock.
So should you hop on in alongside these analysts? Let's find out.
A business shift has improved margins across the board
Amazon is undergoing quite a business transformation. Gone are the days when Amazon was solely an e-commerce company; now it has multiple ancillary business segments like advertising and cloud computing (Amazon Web Services, or AWS). It's also had quite the transformation within its commerce segment -- Amazon's direct sales have remained relatively flat for some time, but third-party seller services have steadily grown.
| Period | Online Stores Currency Neutral Growth | Third-Party Seller Services Currency Neutral Growth |
|---|---|---|
| Q3 2022 | 13% | 23% |
| Q4 2022 | 2% | 24% |
| Q1 2023 | 3% | 20% |
| Q2 2023 | 5% | 18% |
Data source: Amazon.
This is a key shift, as Amazon is no longer responsible for inventory, which falls to the seller instead. Combine that with the rise of other higher-margin businesses, and it's resulted in massive gross margin expansion.
AMZN Gross Profit Margin (Quarterly) data by YCharts
With Q2 seeing the highest gross margin in recent company history, it's a great sign for investors. A higher gross margin comes with a greater profit margin if a company is efficient. With CEO Andy Jassy's focus on reducing unnecessary expenses and setting the company on a path to become more lean, Amazon is achieving that. He's accomplished this by growing operating expenses slower than revenue since he became CEO on July 5, 2021.
AMZN Revenue (Quarterly) data by YCharts
And these efficiency measures aren't done yet, which excites investors about the future.
The bar is set fairly low by more analysts
For Amazon to achieve the $230 price target, it must continue down its efficiency path and grow revenue. In 2024, Wall Street analysts expect Amazon to grow revenue by about 12%, so part of the stock return will come from that growth.
However, they also expect Amazon to post earnings per share of about $3.15. Using today's share count as a basis, that would indicate a net profit of $32.5 billion and a profit margin of 5.1%. That's almost exactly the profit margin Amazon posted in Q2 -- 5.02%.
So if Amazon can maintain its current profitability level with 12% growth, it will hit analyst expectations.
However, that seems like a pretty low floor, because Amazon has consistently improved its profitability under Jassy's leadership. So with Amazon's projected growth and improving efficiency, it's not hard to imagine a scenario where profits explode higher and investors get excited about Amazon.
That's the scenario Redburn Partners envisions, and I think they aren't too far off. At this price, Amazon is a fairly low-risk company, and investors shouldn't hesitate to take a position in it.
