Macro data points appear to be the order of the day and are driving market sentiment. Morgan Stanley analyst Brian Nowak is keeping a close watch on such developments and has already lowered online ad and e-comm estimates while also having a “recession playbook” close at hand.
However, the analyst also thinks its “important to think through the chance that there is a softer landing… and that middle-to-high end consumer holds on.” “Before you know it,” Nowak went on to say, “we could be debating ’23 micro-level fundamentals.”
And one company that bears looking at as 2023 begins to glimmer in the distance is Amazon (AMZN).
The macro conditions and the post-pandemic pivot away from online shopping to brick-and-mortar retail have hurt the ecommerce giant. But Amazon’s profitability issues are more company specific.
The company has spent huge amounts on expanding its shipping/logistics and warehouse capabilities over the past few years. So much so that its shipping/logistics square footage in 2022 is “set to be larger than its fulfillment footprint in 2019.”
At the same time, the company has also expanded the workforce and increased wages. The problem, though, is that with the economic downturn and waning demand, now the company has an excess of both. And these have combined to weigh on near-term profitability.
However, Amazon is now “significantly slowing its forward build.” Nowak also expects to see fulfillment utilization getting better (increasing ~8% year-over-year in 2023) with units/shipping square foot “stabilizing” by next year.
And with Amazon pointing to savings made compared to what it would need to pay to external carriers, the degree to which the company is able to “further insource” extra shipping capacity via AMZL (Amazon Logistics) should be a “positive driver of EBIT.”
“Similar to past AMZN build cycles,” Nowak explained, “we see a slowing build and rising utilization leading to improved retail unit economics (seen through fulfillment and shipping cost/unit trends) and effectively a ‘harvest’ of retail profitability.”
To this end, Nowak reiterated an Overweight (i.e. Buy) rating on Amazon shares along with a $175 price target. The implication for investors? Upside of ~42%. (To watch Nowak’s track record, click here)
Overall, Wall Street remains bullish on Amazon. One Hold and Sell, each, are countered by 36 Buy ratings and all coalesce to a Strong Buy consensus rating. The average target is slightly above Nowak’s objective, and at $180.13, is set to yield returns of ~46% in the year ahead. (See Amazon stock forecast on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
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