Amazon still has room to run as it drives profit back to pre-pandemic levels, according to Morgan Stanley. Analyst Brian Nowak rated Amazon a “top pick” and maintained his overweight rating on the stock. He also kept his price target of $175 on shares, which implies 20.8% upside from Wednesday’s closing price of $144.85. “We believe management is highly focused on improving efficiency and profitability and demonstrating to investors that their business model can indeed deliver ROI after two challenging years,” Nowak wrote in a Wednesday note. “If this ‘efficiency upside’ plays out, our peer [price/earnings-to-growth] analysis shows how AMZN shares could have 20-60% upside from here.” Nowak expects Amazon to reach a share price ranging between $160 and $230, driven by an increase in earnings per share on the basis of generally accepted accounting principles, or GAAP, to more than $5. Amazon recently delivered a better-than-expected second quarter with EPS increasing to 65 cents, compared to a loss of 20 cents per share last year. Here’s how the analyst thinks Amazon can improve its retail profitability: Lower shipping and fulfillment cost per unit through higher square footage and logistics employee utilization, which Nowak sees as “the largest driver of efficiency” and significant driver of higher profitability. Increased discipline on content spend, which the analyst said can quickly result in billions of retail profit upside. Lower discounting, less inflation and fewer supply chain challenges are sources of potential upside, with the analyst noting that merchandise margins are still below Amazon’s 2018/2019 levels. The analyst said Amazon could warrant a higher price/earnings-to-growth ratio than its tech peers given its larger growth runway across multiple business lines such as global retail, cloud, health care and more, as well as the increasing value of its Prime subscriber base. Shares of the Big Tech company have rallied 72% this year, and they touched a fresh 52-week high Thursday. The stock has gained roughly 5% so far in September. — CNBC’s Michael Bloom contributed to this report.
Source: www.cnbc.com