AMZN is our top megacap pick, Roth says

It has been resurgent in 2023, but Roth MKM analyst Rohit Kulkarni thinks there is still money to be made on Amazon (Amazon Stock Quote, Chart, News, Analysts, Financials, Nasdaq:AMZN).

On October 26, AMZN announced its third quarter, 2023 results. The company reported net income of $9.9-billion on net sales of $143.1-billion, a topline that was up 13 per cent over the same period last year.

“We had a strong third quarter as our cost to serve and speed of delivery in our Stores business took another step forward, our AWS growth continued to stabilize, our Advertising revenue grew robustly, and overall operating income and free cash flow rose significantly,” CEO Andy Jassy said. “The benefits of moving from a single national fulfillment network in the U.S. to eight distinct regions are exceeding our optimistic expectations, and perhaps most importantly, putting us on pace to deliver the fastest delivery speeds for Prime customers in our 29-year history. The AWS team continues to innovate and deliver at a rapid clip, particularly in generative AI, where the combination of our custom AI chips, Amazon Bedrock being the easiest and most flexible way to build and deploy generative AI applications, and our coding companion (CodeWhisperer) allowing enterprises to have the equivalent of an experienced engineer who understands all of their proprietary code is driving momentum with customers, including adidas, Booking.com, GoDaddy, LexisNexis, Merck, Royal Philips, and United Airlines, all of whom are starting to run generative AI workloads on AWS. Between AWS re:Invent and our 29th holiday shopping season, this is a particularly action-packed time of year at Amazon and we’re excited for what’s to come.”

The analyst summed up the quarter.

“AMZN reported an impressive 3Q beat with accelerating trends in Advertising & e-Commerce coupled with stable Cloud growth,” Kulkarni said. “CapEx is set to decline 20% YoY while op. margins increased across all segments. While 4Q Rev midpt guidance came below expectations, we heard encouraging AWS commentary and feel bullish about the accelerating FCF outlook. Our ests grind higher, PT stays at $165, implying ~15x ’24E EBITDA. At current levels, AMZN remains our #1 mega cap pick, followed by META at #2, and GOOGL at #3.”

In a research update to clients November 27, the analyst maintained his “Buy” rating and one-year price target of $165.00 on AMZN.

Kulkarni thinks Amazon will post EPS of $2.64 on revenue of $571.4-billion in fiscal 2023. He expects those numbers will improve to EPS of $3.44 on a topline of $623.9-billion the following year.

“Our sum-of-parts valuation implies $1.59tn market cap ($680bn for Retail, $690bn for AWS, and $300bn for Advertising/Other), and our PT implies approx. 15x ‘24E EBITDA. We believe this methodology appropriately attributes value across Amazon’s three business segments with different growth and margin profiles,” the analyst concluded.