This Is Why JP Morgan Is Bullish on Amazon Stock

Equity markets have struggled in 2022. YTD, the S&P 500  (SPY) - Get Free Report index has lost over 24% of its value, while the tech-heavy Nasdaq Composite has dropped almost 33%. Amazon  (AMZN) - Get Free Report performed in line with the tech index, having also fallen 33% since the year began.

The current bearish cycle has been driven by persistent inflation, which has delivered a one-two punch to stocks. Inflation has increased companies’ operating costs, but it has also prompted the Federal Reserve to rapidly raise interest rates - which has in turn made the overall equities market much less appealing.

In a rising rates environment, investors should seek companies that are able to (1) continue to grow amid the crisis or (2) hedge their losses and survive the storm. Analysts at JP Morgan believe Amazon has been doing both.

Read more from Amazon Maven: Amazon Stock: Should You Buy It in October 2022?

Revenue Expansion

JPM recently reiterated that Amazon remains their top internet stock pick. The investment bank claims that the e-commerce juggernaut is still capable of delivering top-line growth, via both retail and AWS.

“AMZN remains our favorite name by a wide margin. And while it may be a top pick of many and feel somewhat owned, we believe there is also growing caution across both Retail and AWS in our discussions,” the investment firm stated in a client note.

There’s good reason to be cautious about Amazon’s retail segment. Indeed, Amazon’s online store has not presented significant growth for four consecutive quarters now.

However, the cloud arm remains AMZN’s real profit driver, and it has not disappointed: AWS has grown an astounding 30% every quarter for the past four quarters.

Another revenue driver worth mentioning is Amazon’s Prime membership. JP Morgan’s Doug Anmuth believes this membership program is worth nearly eight times its charged price, which leads the analyst to believe the company has significant pricing power.

In other words, if need be, Amazon could raise its Prime membership cost by a few extra dollars. If it did, it would see almost no dropoff in membership numbers, and the extra revenues would flow cleanly to its bottom line.

"We did another Prime deep dive, and we estimate unbundling all of Prime’s components reveals a package worth ~$1,100/year, ~8x the actual $139 annual Prime cost in the US, +10% from our estimated ~$1,000 value in 2020 & double our ~$544 estimated value in 2016," said Mr. Anmuth.

Trimming Losses

So far Amazon has been doing what it can to cut down on expenses. The company has announced it will freeze corporate hirings until the end of 2022, which should help it slow its spending.

Before that, Amazon’s CFO, Brian Olsavsky, stated during the company’s Q2 earnings conference that Amazon had made “solid progress in reducing these [incremental] costs.” In line with their expectations, the company was able to save an extra $4 billion in expenses.

The “good” news is that cost challenges are largely related to inflated shipping rates, which have affected not just Amazon but the whole retail ecosystem. JP Morgan’s bullishness is rooted in the idea that the e-commerce behemoth can last longer than the competition in such a tough environment, as the company is “better hedged than … others, with product costs in the local currency and AWS Revenue mostly in USD.”

Increasing Cash Flows

JPM is sticking with its “Best Idea” status for Amazon stock. The firm sees Amazon’s revenues as being poised to increase, but, also positively, projects moderating capex and increasing margins.

According to Mr. Anmuth, the combination of expanding revenues and loss trimming should result in a “significant FCF [free cash flow] inflection in 2023.” Consequently, the retail-tech behemoth’s free cash flow could reach nearly $28 billion by the end of the next year - that would put it back at pre-Covid levels.

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting the Amazon Maven)