Amazon’s stock is on pace to have its worst performance in three years — but Cowen’s analysts still see it as a ‘best idea for 2020’ (AMZN)

  • Analysts at Cowen called Amazon one of its “best ideas for 2020,” in a note published on Tuesday.
  • They are predicting Amazon’s stock to jump 36% next year, a huge bounce back from this year’s roughly 18% increase, which would be the smallest gain since 2016.
  • The report underscores how Wall Street analysts remain bullish on Amazon despite concerns of the company’s slowing growth and deepening spend.
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Amazon’s stock has seen relatively modest growth this year, but analysts at the financial services firm Cowen remain upbeat about its performance next year.

In a report published Tuesday, Cowen analysts called Amazon one of the investing firm’s “best ideas for 2020,” predicting a 36% gain in stock price for the full year. That would be a huge bounce back for Amazon, whose shares have appreciated just about 18% this year — the smallest gain since 2016 and below the 27% jump in the broader S&P 500.

“We expect strong continued revenue growth in 2020 coupled with margin expansion,” Cowen analyst John Blackledge wrote.

The report shows Wall Street analysts’ continuing faith in Amazon despite concerns of the company’s slowing growth and deepening spend. Out of the 49 analysts that have a rating on Amazon, 47 recommend buying its stock, with no one giving it a “sell” rating, according to FactSet. In its most recent quarter, Amazon’s stock dropped as much as 9% after giving dismal revenue guidance for the holiday shopping season and shrinking profitability that fell below street estimates.

Here’s why Cowen is bullish on Amazon’s stock:

  • Strong revenue growth: Cowen expects Amazon’s revenue to show strong growth in 2020, led by its e-commerce, advertising, and AWS cloud segments. Amazon’s online retail revenue is reaccelerating, while advertising and AWS sales continue to show robust growth (although slower than in previous years).
  • Undervalued stock: Cowen believes Amazon’s stock is undervalued, based on its enterprise value multiple. The 14.5X multiple is on the lower side of the past 5 years’ range, meaning there’s more upside potential.
  • Further Prime growth: Cowen says Amazon’s Prime membership is an “under appreciated” part of its business. Amazon currently has at least 69 million Prime households in the US, which is a 13% increase from the year-ago period and a much larger growth rate than the year before, according to Cowen’s data. It also marks the third straight quarter of member acceleration, correlating with the launch of one-day delivery earlier this year, it said.
  • Advertising business: Cowen estimates Amazon’s advertising revenue to total $17.6 billion in 2020, up 36% year-over-year, and to reach $46.6 billion by 2025. Advertising, alongside the AWS cloud unit, is hugely profitable, and Cowen expects the two segments to account for over 90% of Amazon’s total operating income in 2020.
  • Slowing spend: Cowen expects Amazon’s investments in one-day delivery and AWS cloud to slow next year, resulting in bigger margins for the company. Amazon said it’s on pace to spend over $3 billion in faster delivery this year, but that should ease by the second quarter of next year, Cowen predicted. Also, AWS will likely slow its spend in sales and marketing next year, it said.
  • Risks: There are still risk factors. Cowen pointed to AWS’s revenue slowdown, which dipped below 40% growth rate for two straight quarters, and higher investment spend than expected as two main risks. Also, there’s the regulatory risk around antitrust and Amazon’s various business practices, it said.
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