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'Magnificent Seven' investing playbook: Amazon's opportunities 'the same as its challenges,' analyst says

Now that summer’s coming to an end, that means it’s time to pull out your scarves, grab a pumpkin spice latte, and reassess your tech stocks. This Yahoo Finance series helps you decide what to do with your shares of the biggest names in tech — Apple, Alphabet, Amazon, Microsoft, Meta, Nvidia, and Tesla — known as the Magnificent Seven. Up next: Amazon.

Amazon (AMZN) is still in pandemic recovery mode.

The e-commerce giant — which ramped up its business in 2020 and 2021 to meet the generationally high level of demand spurred on by the pandemic — was forced to pull back in a very public way this year, becoming one of the most visible tech giants to conduct large-scale layoffs.

Amazon has put the brakes on all sorts of things throughout the last year, from shuttering Amazon Books storefronts to folding a range of in-house brands.

"The company got ahead of itself in terms of facilities expansion, distribution expansion, proprietary product introductions, and continues to work through that," Morningstar analyst Dan Romanoff told Yahoo Finance. "So this is the new Amazon, but it's not clear these actions were enough. We’ll get a better sense of this over the next few quarters, but this is an ongoing process."

Moving forward, Amazon walks a fine line: It has to balance growth with cost-cutting — something that tech isn't exactly known for with its "spend to grow" mentality.

"The opportunities are the same as the challenges," Romanoff said. "Shuttering stores and products saves money but could hurt growth. Were the actions taken enough to generate acceptable margins? If not, management can do more cost-cutting."

Additionally, concerns about slowing growth in Amazon Web Services (AWS) have also followed the company for the last few quarters. And when it comes to Amazon's growth, AWS still rules the roost.

"Where their stock can really appreciate is if their AWS growth picks up," Citizens JMP Securities analyst Nick Jones said. "If this AI wave picks up and AWS gains ground, that's how they'll end the year up from where they are now. ... AWS is what's going to drive most of the upside for now."

To be clear, Amazon has "room to grow across all their business segments," Jones added. It's just a matter of execution and, in the case of the company's nascent but thriving advertising business, time.

And even amid a cloud slowdown, Amazon is still a resilient business in large part due to its e-commerce operation. While Amazon is working to improve its retail margins, it's hard to find a better name in online shopping right now.

"If you look across e-commerce stock prices, Amazon has been the best performer," Jones said. "Whether it's Etsy, Wayfair, parts of Chewy, you name it, pretty much everything else in e-commerce is mostly discretionary. ... In a recessionary environment or a stilted macroeconomic environment, Amazon is where you go for everything from pasta to paper towels. Based on the consumer, Amazon will stay stable."

An Amazon messenger delivers a package.
An Amazon messenger delivers a package in Manhattan on Sept. 16, 2023. (Michael Kappeler/picture alliance via Getty Images) (picture alliance via Getty Images)

So what should you do with Amazon stock?

As with all Big Tech stocks, the first consideration here is valuation. Amazon stock has climbed 61% year to date.

If you buy that Amazon can walk this efficiency-growth tightrope, it's not the worst time to buy the stock, according to Romanoff.

"Shares are trading at $136 versus our $150 fair value estimate," Romanoff said. "So we see shares as about 10% undervalued. I think that’s pretty attractive for a high-quality wide-moat name like Amazon."

Jones was optimistic about 2024, with the caveat that we probably won't see Amazon's best before then unless AWS really barrels ahead.

"We think the price can run up towards $175 next year, but the only thing that would get it there before the end of the year is high-teens or better AWS growth," Jones said.

And, if you're a bit bemused by the Amazon iceberg, you're not alone. It's not an easy business to get your head around in the aggregate.

"It can be a hard business to value because each part of the business is different, relying on a unique valuation to find the sum of the parts," Jones added.

Allie Garfinkle is a Senior Tech Reporter at Yahoo Finance. Follow her on Twitter at @agarfinks and on LinkedIn.

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