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Amazon's stock rallies as analyst says Wall Street doesn't give it enough credit

By Emily Bary

Investors are overlooking signs of momentum with retail efficiency efforts, according to Wells Fargo

Wall Street is underestimating Inc.'s ability to become more efficient, according to one analyst.

Investors are overlooking recent commentary from Amazon (AMZN) that points to signs of progress being made already, Wells Fargo analyst Ken Gawrelski wrote on Wednesday.

One key issue for Amazon investors concerns the company's potential to improve profits in its North America retail business. But Gawrelski doesn't think Wall Street is paying enough attention to comments made by Chief Executive Andy Jassy at the company's annual meeting in late May. Jassy called out a roughly 15% reduction in the distance items are traveling from fulfillment centers to customers and a 12% decline in touches, or how often a package is handled.

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"We see North America retail margins improving more quickly than consensus with 2018 margins returning by 2025, implying significant [operating-income] upside," Gawrelski wrote, as he initiated coverage of Amazon's stock with an overweight rating and a $159 price target.

The stock is up 2.2% in afternoon action Thursday.

Read: Amazon boasts 'untapped potential' that could propel its stock higher, says analyst

In Gawrelski's view, Amazon's shift to a regional fulfillment-center model from a national model could lead to $6.45 billion in annualized savings.

"By carrying a broader range of inventory in fulfillment centers, the company should be able to decrease the volume of items that ship directly from an FC to a customer's house, as opposed to an item shipped from an FC, to a regional sortation center, to a customer's house," he explained.

He likes other elements of Amazon's story as well. For one, the company is well positioned to grow its advertising business and reap financial benefits there. Advertising could come to represent 8% of Amazon's 2023 North America segment revenue, double what it did in 2018, by his estimates, thereby reducing the amount by which Amazon needs to see expenses decline in order to return overall margins to 2018 levels.

There's also Amazon's AWS cloud-computing business, which has seen growth slow lately but seems poised for a turnaround.

"We expect AWS is bottoming in [the third quarter]," Gawrelski wrote, adding that it "should reaccelerate to more healthy growth rates exiting 2023, dampening the AWS bear case."

Read:Amazon's stock is misunderstood for these 3 reasons, according to an analyst

-Emily Bary

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.


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06-08-23 1347ET

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