6 reasons to be super bullish on Amazon stock: Analyst

Yahoo Finance Live’s Brian Sozzi discusses a Jefferies analyst’s valuation on Amazon shares as well as his own take on why the stock may be oversold.

Video transcript

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JULIE HYMAN: Amazon shares down over 30% this year. The stock is the third-worst performer within the FANG complex. But is the sell-off starting to look overdone? One analyst on Wall Street says yes. That bullish note is where we find Brian Sozzi's take today.

BRIAN SOZZI: Yeah, we're fusing my take with friend of the show Brent Thill over at Jefferies. I liked his note really going in-depth on the valuation on Amazon, and why the stock might be oversold. Let's toss up a couple of his reasons here. First and foremost, like I just mentioned, valuation on that core retail business is too cheap in Phil's estimation.

Now Brent has come out before a couple of months ago, saying that the market is valuing their retail business-- Amazon's, that is-- at 0, which is just shocking to hear, given their domination in the retail space. But nonetheless, something to keep in mind here. Next up, Amazon Web Services is a nice thing to have in a recession. Brent is making the case here that Amazon's business is very diversified, and even in a recession, it's hard to believe that companies would be cutting back on Amazon Web Services because it is in many respects the backbone on how they operate their businesses.

And then lastly here, according to Brent, margins could improve a lot next year as Amazon continues to cut billions in dollars of expenses. They are slowing down how much capacity they're adding to their various shipping areas or parts of their business. So those costs can come down, and inflation will likely come down-- thanks to the Fed, you name it, whatever-- will likely come down next year, making comparisons a little easier. Now, I say-- or "Yahoo Finance" says here, in this case-- here's another graphic-- hello, second Prime Day in October.

This is coming up in-- I believe it's next week. This could be a big sales driver for Amazon. Brent put an estimate there, I believe, of maybe $6 billion in gross merchandise value alone. So that could be a pretty big driver for Amazon ahead of the holiday shopping season. Also, too, the stock is trading at a big price to earnings multiple discount versus the past three year average.

Right now about 45 times forward earnings. Amazon stock the past three years trades usually at about 55 times. So you're seeing a discount there. Of course, it's still trading at a premium to the S&P 500, which is at about 16 times. And then last, but not least, it's Amazon. This company has a leadership position in retail, leadership position in Amazon Web Services. It's almost hard to bet against this company.

And then my take over here is I'm not telling you, obviously, to buy the stock. I'm not saying go out there and buy Amazon. But there are strong--

JULIE HYMAN: But!

BRIAN SOZZI: But-- dot-dot-dot-- I'm stopping short of actually telling--

JULIE HYMAN: But Brent is!

BRIAN SOZZI: What Brent is suggesting-- yes, he's looking for 42% upside in Amazon shares, and there are a lot of positive catalysts, I think, coming into play with Amazon. First is that second Amazon Prime Day I just mentioned. That is going to be a real test of the demand to buy Amazon stock into a potential Santa Claus rally in the fourth quarter.

BRAD SMITH: I'd offer one thing in addendum here. In the advertising division-- which is one of the fastest growing lines of business within Amazon as well over the past three years-- there is a conversion rate that Amazon provides to advertisers and marketers that is tough to come by on some of the even social media platforms that are allowing even more of the e-commerce shop ability element. And so if you do have a time where there is this pullback of some of the marketing spends or marketing dollars, there are still going to be advertisers that go and look for the best value play-- the highest conversion and click-through rate-- that actually goes into a purchase decision.

And for Amazon, they've got that. Apple, they're building out a stronger advertising business. And even Netflix that's building out an ad tier. It's going to be tougher to go up against an Amazon or an Apple that already has an install base, that already has an ease of shopping that is directly correlated to any campaign that could be run.

JULIE HYMAN: I would also argue that Amazon, over the last few years, has really built up its necessities business, right? Initially, Amazon was a discretionary business. You bought books on there. Then you bought gadgets on there, et cetera. Now, many people buy groceries on there. They buy toilet paper on there.

BRIAN SOZZI: I just bought energy drinks. Yeah. It's great.

JULIE HYMAN: Right. And for many of those items, they sell it at a competitive price. So if you're looking at it comparable to the largely bricks-and-mortar retail stock of, say, a Walmart, a Target, a Dollar General, et cetera during a time of economic downturn-- is Amazon also seen as a place where people are going to still be buying their basics at a reasonable price? Are they going to remain competitive in those areas?

I think that'll be really interesting to see. We know you don't-- you're not an Amazon guy. What's the last thing you bought on Amazon? I'm just curious, because I was thinking about myself.

BRIAN SOZZI: Caffeinated seltzer. And then I needed new valve stem covers for my car for the tires. I left-- when I put the air in the tire, I left it on the floor. A mistake. But look, a quick plug for myself. I have a full story on Brent's note on the "Yahoo Finance" homepage.

JULIE HYMAN: I bought sponges.

BRIAN SOZZI: Sponges?

JULIE HYMAN: For the sink.

BRAD SMITH: Solid.

JULIE HYMAN: And wet dog food.

BRIAN SOZZI: The ones with the soap in it? The sponges with the soap in it?

JULIE HYMAN: No, I don't like the sponge--

BRIAN SOZZI: You don't like the sponge with the soap in it?

JULIE HYMAN: --with the soap in it. No. No.

BRIAN SOZZI: Just curious.

JULIE HYMAN: Just like Scotch-Brite, the--

BRIAN SOZZI: I'm just doing a little reporting. I'm trying to--

JULIE HYMAN: Yeah.

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JULIE HYMAN: So in my case, I buy basics. So maybe I'm projecting. But it sounds like--

BRIAN SOZZI: I have the soap one.

JULIE HYMAN: --in your case, too.

BRIAN SOZZI: The soap one's good. They have the wands at Target-- they're really cool.

JULIE HYMAN: Yeah, I've seen those, but-- yeah. Eh. I've never been a fan of those.

BRIAN SOZZI: All right.

JULIE HYMAN: I like a little elbow grease.

BRIAN SOZZI: Fair enough.

JULIE HYMAN: Whatever. (LAUGHING) OK.

BRAD SMITH: Tweet us the last thing you bought on Amazon, folks, @YahooFinance.

JULIE HYMAN: Yes! Do.

BRAD SMITH: Don't. But anyway--