One Truist analyst believes there is 42% upside in Amazon’s stock at today’s prices.
On Monday, Truist analyst Youssef Squali reiterated his buy rating on tech juggernaut Amazon (AMZN -0.20%), raising his price target from $230 to $265. That target implies 43% price appreciation over the next 12 months.
Based on Truist card data tied to Amazon’s U.S. revenue, Squali thinks the company is on track to meet or exceed sales guidance for the third quarter. With analysts expecting 10% revenue growth in the upcoming quarter, Amazon’s ability to maintain double-digit sales growth would be reassuring following a handful of quarters with single-digit growth over the last few years.
Noting a more resilient consumer, growing ad revenue, faster growth at Amazon Web Services, and improved operating margins, Squali reiterated his bullishness, explaining, “This (occurs) even as the company invests aggressively in AI, Amazon Web Services (AWS), logistics, and Project Kuiper.”
Amazon’s growth optionality is available at a discounted valuation
Trading at just 18 times cash from operations (CFO), Amazon’s valuation is at its lowest level since 2010 and is well below its 10-year average of 28. To put this price-to-CFO ratio in perspective, if Amazon quit investing in its vast array of growth options (AI, AWS, ads, Kuiper, logistics, Prime Video, international, etc.), it would be capable of generating immense amounts of free cash flow (FCF).
Quite frankly, though, it doesn’t want to do that — and investors shouldn’t want it to. With one of the most incredible track records on the market regarding the company’s growth optionality with new businesses, like AWS, online ads, and its own logistical network, Amazon’s greatest strength is continuously deploying capital effectively.
Amazon’s relatively cheap valuation, paired with a high-and-rising 18% CFO margin while the company is investing aggressively in its growth options, has me in agreement with Squali’s optimism.
The icing on the cake for investors?
AWS holds a leading 31% market share of the booming cloud infrastructure industry, which experts expect to double in size by 2028. Since AWS brings in more than half of Amazon’s operating income, the company’s funding for its promising growth optionality should face no shortage of cash anytime soon.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Josh Kohn-Lindquist has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Truist Financial. The Motley Fool has a disclosure policy.
