Amazon’s Prime Day to Remind Wall Street of Its Retail Dominance

(Bloomberg) — In all the excitement around artificial intelligence, Amazon.com Inc.’s (AMZN) most important business has been somewhat forgotten by investors. This week’s Prime Day event could change that.

The two-day shopping jamboree, starting Tuesday, is expected to show robust growth and reinforce Amazon’s dominant position within e-commerce — and in retail overall. It could also underline how enhancements made during Covid continue to pay off, a positive signal before the company’s second-quarter results.

“Those investments are improving efficiency, and there’s room to surprise to 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 it can improve its retail margins, that will definitely drive the stock higher.”

Analysts at Jefferies wrote last week that improved efficiencies in Amazon’s retail business would boost the e-commerce giant’s Ebit margins fourfold — from 2.4% in 2022 to 9.9% this year.

While Prime Day sales have faded as a direct driver for the stock, a strong showing would provide further justification for the 29% rally in 2024, a move that has lifted Amazon above a $2 trillion market valuation. The Nasdaq 100 Index is up 21% so far this year.

Shares rose 2% on Tuesday.

Much of that advance reflects the benefit the company could see from AI and its Amazon Web Services cloud-computing division. Last quarter, Amazon said generative AI represented a “multi-billion dollar revenue run rate business.”

Even so, while AWS is Amazon’s most profitable unit, retail remains the primary contributor to sales.

Online stores accounted for 40.3% of Amazon’s 2023 revenue, according to data compiled by Bloomberg. Another 24.4% came from commissions and other services sold to the third-party sellers who list their wares on Amazon’s sites.

AWS generated less than 16% of total sales last year, with the annual pace of growth at 13%. That’s faster than the 5.4% seen at online store, but trailing the 18% increase for third-party seller services.

Amazon’s most recent revenue forecast was weak, a sign of caution about the e-commerce business, especially as retail-sales data has been underwhelming. There is some optimism that Prime Day will ease those concerns, helped by added momentum from Amazon’s new AI shopping assistant.

“Prime Day should promote an early start to back-to-school/college shopping during a quieter time in the retail calendar,” and the “financial benefits extend well beyond the 2-day event period,” wrote JPMorgan analyst Doug Anmuth. He pointed to downstream tailwinds for Amazon’s advertising business and membership trends.

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JPMorgan projects total gross merchandise value of $12.4 billion over 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, it estimates.

This pace of growth, along with an expanding market share within e-commerce, is why JPMorgan last month tipped Amazon to surpass Walmart Inc. as the largest US retailer this year.

“Retail sometimes gets a little lost amid AWS, but it remains a great business and there’s a strong bull case to be made for e-commerce,” said Stephen Lee, founding principal at Logan Capital Management. “Prime Day is less of a catalyst than it used to be, but it’s an opportunity to highlight how Amazon offers reasonable values on top of the game-changer of same-day delivery.”

Amazon’s dominant positions in both retail and cloud-computing support the argument that its shares are a relative bargain. The stock trades at 33 times estimated earnings, and while this is above the 27 multiple of the Nasdaq 100, it is well below Amazon’s 10-year average of about 55. The valuation isn’t far from multiyear lows.

More than 95% of the analysts tracked by Bloomberg recommend buying Amazon, and the average price target points to upside of 15%, as of its last close, the highest return potential among megacaps.

The company is expected to generate revenue growth of 11% this year and maintain a double-digit pace for the subsequent two years. Net earnings are projected to soar 63% this year.

“This kind of growth can support the multiple, which I think will continue to compress as Amazon maintains strong earnings growth,” said FBB’s Brenner. “It would be a little flip to call the retail business gravy, but Amazon’s clearly an amazing company even without AWS.”

Tech Chart of the Day

In a positive sign of improving market breadth, more than 70% of Nasdaq 100 Index components are trading above their 50-day moving average. This is near the highest such ratio since February, and a dramatic turnaround from April, when fewer than 20% were above this closely watched level.

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(Updates to market open.)

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