(Bloomberg) — Amid all the excitement over artificial intelligence, Amazon.com Inc.’s biggest business has been somewhat overlooked by investors. This week’s Prime Day event could change that.
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The two-day event, which kicks off Tuesday, is expected to showcase robust growth and reinforce Amazon’s dominance in e-commerce — and retail more broadly. It could also highlight how improvements made during the Covid pandemic continue to pay off, a positive sign ahead of the company’s second-quarter results.
“These investments are improving efficiency and there is room to surprise on the upside with faster expansion and improved margins,” said Mike Brenner, research analyst at FBB Capital Partners. “Prime Day used to be about revenue, but now investors are looking for growth and margins, and if the company can improve its retail margins, that will certainly drive the stock price higher.”
Jefferies analysts wrote last week that improved efficiency in Amazon’s retail operations would quadruple the e-commerce giant’s EBIT margins, from 2.4% in 2022 to 9.9% this year.
Even though Prime Day sales have declined as a direct driver of the stock, a strong showing would further justify the 29% rally in 2024, a move that has lifted Amazon above a $2 trillion market valuation. The Nasdaq 100 index is up 21% year to date.
Shares rose 2% on Tuesday.
Much of that growth reflects the company’s potential gains from artificial intelligence and its cloud computing division Amazon Web Services. Last quarter, Amazon said generative AI was a “multibillion-dollar revenue business.”
Still, even though AWS is Amazon’s most profitable unit, retail remains the largest contributor to sales.
According to data compiled by Bloomberg, online stores accounted for 40.3% of Amazon’s revenue in 2023. Another 24.4% comes from commissions and other services sold to third-party sellers who list their products on Amazon sites.
AWS generated less than 16% of total sales last year, with a 13% annual growth rate. That’s faster than the 5.4% growth seen for online stores, but less than the 18% increase seen for third-party sales services.
Amazon’s most recent revenue forecast is weak, a sign of caution about the e-commerce sector, especially as retail sales data has been disappointing. Some are hoping that Prime Day will ease those concerns, thanks to the added boost provided by Amazon’s new AI shopping assistant.
“Prime Day should support an early start to back-to-school/college shopping during a quieter period in the retail calendar,” and the “financial benefits extend well beyond the two-day event period,” wrote JPMorgan analyst Doug Anmuth. He pointed to downstream tailwinds for Amazon’s advertising business and membership trends.
JPMorgan is forecasting total gross merchandise value of $12.4 billion during the event, an increase of 12%, along with $7.9 billion in total retail net sales. Of that, $5.8 billion will be revenue Amazon wouldn’t have generated without Prime Day, the firm estimates.
That pace of growth, along with a growing market share in e-commerce, helps explain why JPMorgan estimated last month that Amazon would overtake Walmart Inc. as the largest U.S. retailer this year.
“Retail sometimes gets a little lost in the AWS shuffle, but it’s still a great business and there’s a lot to be optimistic about in e-commerce,” said Stephen Lee, founding principal of Logan Capital Management. “Prime Day is less of a catalyst than it used to be, but it’s an opportunity to highlight how Amazon is offering reasonable deals on top of same-day delivery, which is a game changer.”
Amazon’s dominance in retail and cloud computing supports the argument that its stock is a relative bargain. The stock trades at 33 times estimated earnings, which is higher than the Nasdaq 100’s multiple of 27 but well below Amazon’s 10-year average of about 55. The valuation is not far from multi-year lows.
More than 95% of analysts tracked by Bloomberg recommend buying Amazon, and the average price target points to a 15% upside as of its last close, the highest potential return among mega-caps.
The company is expected to generate 11% revenue growth this year and maintain a double-digit pace for the next two years. Net profit is expected to increase 63% this year.
“That kind of growth can support the multiple, which I think will continue to compress as long as Amazon maintains strong earnings growth,” FBB’s Brenner said. “It would be a bit of a stretch to say that retail is a success story, but Amazon is clearly an incredible business even without AWS.”
Tech Chart of the Day
In a positive sign of improving market breadth, more than 70% of the Nasdaq 100 index’s components are trading above their 50-day moving averages. That’s near the highest ratio since February and a dramatic turnaround from April, when less than 20% were above that closely watched level.
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