Since Amazon (NASDAQ:AMZN) released its Q2 report on August 1, the stock has lagged behind the NASDAQ, rising by under 2%, while the tech-heavy index has gained over 7%.
According to Wedbush analyst Scott Devitt, the muted sentiment is down to initiatives like Project Kuiper – Amazon’s plan to build a network of satellites that will provide high-speed, low-latency internet access to underserved regions globally – and associated costs.
But while Devitt acknowledges that Project Kuiper will demand significant long-term investment, the analyst thinks that the impact on near-term profitability will be “modest.” Devitt anticipates around $338 million in operating costs for 2H24 related to Kuiper, and approximately $900 million in 2025, which represents less than 0.4% of his total operating expense estimate for 2025.
“We expect associated operating costs will scale gradually as launch and manufacturing expenses are likely to be capitalized (we est. 7 year useful life) and the launch schedule continues to be delayed with the first full Kuiper launch shifted to 1Q25 from 4Q24,” the 5-star analyst went on to say.
In fact, while Kuiper has been the focus of investors’ attention, Devitt notes that as the revenue mix continues to shift towards higher-margin advertising and AWS revenue, margins are set to improve over the long-term. This transition is expected to generate billions of dollars of “incremental profit” annually, with advertising and AWS together representing more 31% of total revenue by 2029, up from around 26% in 2024.
“The shift in Amazon’s revenue mix combined with ongoing cost efficiencies in the core retail business (automation, regional fulfillment, inbound optimization) and the broadening of Amazon’s fulfillment network off-platform via Supply Chain by Amazon will contribute to sustainable operating margin expansion, and we expect operating income to increase at a ~20% CAGR over the next five years, ahead of both Alphabet (+12.7%) and Meta (+13.0%),” the analyst said, explaining his reasoning.
More in the here and now, looking ahead to the Q3 readout, given investor expectations for 2H profitability have diminished, AWS growth is accelerating, and advertising momentum is gaining strength heading into 2025, Devitt thinks the risk/reward paradigm looks attractive.
“We think investors should take advantage of this period of relative underperformance,” the analyst summed up, giving AMZN an Outperform (i.e. Buy) rating with a $225 price target. If Devitt’s forecast is accurate, investors could see a 22% gain over the next year. (To watch Devitt’s track record, click here)
That’s hardly a controversial take on Wall Street with 44 other analysts joining Devitt in the bull camp, all pitted against just 2 Holds, resulting in a Strong Buy consensus rating. The average target stands at $224.38, closely mirroring the Wedbush analyst’s objective. (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.
