Amazon (NASDAQ:AMZN) is investing in its faster-growing, lower-margin essentials business, with the competitive holiday season approaching.
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That, says Morgan Stanley analyst Brian Nowak, is bound to pose a “tactical risk” to the fourth-quarter EBIT guide.
Nowak makes the case that the increasing emphasis on lower-priced, lower-margin essentials is creating pressure on merchandise margins, thereby hindering the short-term growth of North American retail profits. “Expected discounting in a competitive holiday season (and picky discretionary consumer) create further near-term uncertainty,” the analyst further added.
As such, looking toward the Q3 readout and guide, Nowak’s anticipates Amazon’s Q4 EBIT guide will come in $1-$1.5 billion below current Street expectations.
That sounds like a bit of a bearish take, but that’s not really the case. While Nowak thinks the near-term poses a headwind to profits, these challenges are only temporary and will abate next year. As such, should the shares fall on an outlook that fails to impress, Nowak thinks investors should pounce on the opportunity. “We could see some tactical weakness from this,” he says, “but are buyers on weakness after the potential numbers reset.”
Nowak has previously detailed how capturing essentials is “critical to driving more durable long-term top-line growth,” and he thinks that even with lower-priced essentials, there are ways it can improve profitability (such as via cost to serve efficiencies, basket sizes/scale, and advertising).
Corporate efficiency could also act as a “potential incremental source” of EBIT upside. Management has indicated that it aims to boost the ratio of “individual contributors” to managers by at least 15% by the end of 1Q25 across all divisions. An analysis of the ecommerce giant’s ~$100 billion corporate headcount spend, which includes around 106,000 managers and about 1.4 million non-manager employees, suggests that this could result in savings of $2.1 billion to $3.6 billion in 2025. This could add a 3% to 5% “cushion/upside to ‘25 EBIT.”
Down to business, what does this all mean for investors? Nowak rates AMZN shares an Overweight (i.e., Buy) with a $210 price target, implying the stock will climb 13.5% higher in the months ahead. (To watch Nowak’s track record, click here)
Barring one analyst who prefers sitting on the fence for now, all 43 other recent analyst reviews on AMZN are positive, naturally making the consensus view here a Strong Buy. The average price target stands at $224.05, offering investors potential one-year gains of 21%. (See Amazon stock forecast)
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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.
