- Amazon could surge 23% to $4,000, Bank of America said in a note on Thursday.
- The e-commerce retailer will be facing tough earnings comps in 2021, but multiple expansion could still drive the stock higher, according to BofA.
- These are the 5 investment drivers that could push Amazon higher in 2021, according to BofA.
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Amazon will face tough comparable sales in 2021 after it saw a surge in business due to the COVID-19 pandemic, but that’s no reason to sell the stock, Bank of America said in a note on Thursday.
The e-commerce giant is “still the one to own long-term,” BofA said, after reiterating its Buy rating on the firm and increasing its price target to $4,000, representing potential upside of 23% from Wednesday’s close.
The company’s strong long-term growth prospects include still low e-commerce penetration, a sizable uptick in fulfilment capacity, and the ongoing shift to the cloud, which would benefit Amazon’s AWS division, the note said.
These are the 5 big investment drivers that could continue to push shares of Amazon higher, as well as the 5 top risks the firm faces going forward, according to BofA.
1. "COVID raises expectations for long-term penetration."
"We continue to view global eCommerce penetration as a strong long-term secular growth theme, with much lower online penetration than media or travel, which still have five to ten years to play out," BofA said, adding that "we believe COVID-19 will result in long-term shopping habit changes for many consumers and better service levels from sellers, leading to an accelerated Online shift in underpenetrated categories like Grocery, Food Delivery, and Health & Personal Care."
2. "COVID accelerates long-term shift to the Cloud."
"Post-COVID, we believe the value proposition for the Cloud has never been higher given the need for businesses to constantly adapt to changes. While COVID is pulling forward spend into markets like Remote Work, Cloud, Workflow Planning and eCommerce, we believe all of these markets will also ultimately benefit long-term as well as the world adopts to distributed working and more asset light business practices. As GDP rebounds in 2021, we expect Cloud transaction volumes to increase, adding to strong underlying demand," BofA said.
3. "Potential benefit on retail profitability post-COVID."
"With a substantial amount of the COVID investments representing one-time costs (i.e. buying masks & protective equipment), there is opportunity for Amazon's retail profitability to improve in 2H'21 as vaccine rollout leads to more normalized operations. While Amazon did benefit from lower marketing costs in 2020, Amazon's operating margins could have been 8.5% in 2020 excluding all COVID and Free One Day costs (instead of 5.5%). Street projects an improvement to 6.7% GAAP Operating Margin in 2021, which could have upside potential as COVID spending declines," BofA explained.
4. "Ad sales growth above FANG peers as COVID accelerates shift to 3P."
"Pressure on in-store sales and local activity has led to a digitization of the physical economy, with even high-end restaurant orders shifting online. As a leading eCommerce marketplace, Amazon has had an outsized benefit, with 3Q Other revenue growth (ad sales) accelerating to 51%, significantly outpacing advertising growth at Facebook and Google. The COVID impact on local sales has also appeared to accelerate Amazon's marketplace shift towards 3P as small-businesses have focused more on Online sales," BofA said.
5. "Expanding logistics capability enables new categories."
"Amazon has been rapidly building out its fulfillment capacity to drive customer growth through increased selection and shipping speeds, and this build out accelerated due to the pandemic. Amazon's fulfillment investment should: 1) Improve the shipping service offering and increase control over the customer experience; 2) Improve shopping experience with more availability of 3P items; and 3) Increase scale & efficiency to reduce shipping costs," BofA said.
Despite the rosy outlook, Bank of America did highlight the key risks that could impact Amazon shares negatively in 2021, including growth deceleration hurting investor sentiment, stronger competition from big-box retailers, increased regulatory pressure, pricing pressure in the Cloud unit, and depressed margins due to ongoing investments in logistics build-outs.