The company’s redesigned North American retail business isn’t getting as much credit as it deserves.
Amazon (AMZN -1.65%) doesn’t report first-quarter results until April 30, but analysts are already adjusting their price targets in anticipation. Recently, Citi analyst Ronald Josey raised his bank’s target on the e-commerce and cloud computing giant to $235 per share from $215 per share and maintained a buy rating on the stock.
Josey is projecting a 10% operating margin in 2025 in response to recent success with Amazon’s retail and advertising businesses. The new price target implies a gain of about 37% from recent prices over the next 12 months.
Why Citi is bullish for Amazon
Josey thinks Amazon’s North American retail business could be much more profitable than we currently imagine. Remember, Amazon over-invested at the onset of the pandemic, which led to an operating loss in the fourth quarter of 2022.
In the fourth quarter of 2023, operating income from the North American retail segment came in at $6.5 billion, or about 6.2% of sales. An expansion of that operating margin to 10% or higher could create a windfall for investors, even if sales stagnate.
Amazon’s retail segment has been a long way from stagnant. Last year, revenue from the North American segment jumped 12% higher.
A fair price, but lots of growth is expected
Amazon’s post-pandemic regionalization solutions are boosting efficiency and making the margin expansions Citi is predicting seem reasonable. That said, the stock is more than a little risky at recent prices.
Shares of Amazon have been trading for more than 41x forward-looking earnings expectations. If earnings don’t shoot more than 10% higher in 2024, investors who buy Amazon at its presently high valuation could suffer heavy losses. The stock looks like a buy, but only for investors with a high tolerance for risk.
Citigroup is an advertising partner of The Ascent, a Motley Fool company. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Cory Renauer has positions in Amazon. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.
