Analyst Insights

Citi Reveals Optimistic Outlook for Amazon Amid AI and Streaming Growth

Citi sets a price target of $245, driven by AWS advancements and Prime Video's strategic moves

By Harrison Wall

7/10, 22:52 EDT
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KEY FIGURES

Stock Rating: Buy
Revised Price Target: $245.00
Previous Price Target: N/A
Stock Price (Jul 10, 2024): $199.79

Summary Points

  • AWS's advancements in AI and app development tools are expected to drive Amazon's growth, with a projected 17.3% revenue increase for AWS in 2024.

  • Citi sets a $245 price target for Amazon, based on a 16x multiple of estimated 2025 EBITDA, reflecting optimism in the company's market position and growth potential.

  • Amazon's $20 billion NBA deal and Prime Video content are anticipated to boost ad revenues and differentiate its streaming offerings.

AWS Innovations Drive Amazon's Growth Prospects

Citi's latest equity research report on Amazon.com, Inc. (AMZN.O) centers around the key takeaways from the AWS New York Summit. The report highlights Amazon Web Services' (AWS) advancements in specialized models, agents, and efforts to reduce hallucinations in AI-generated content. These innovations are expected to bolster AWS's competitive edge and drive future growth. The summit showcased AWS's new capabilities, including memory retention for agents, support for code interpretation, and the launch of AWS App Studio and Amazon Q Apps, which democratize app development. These developments are pivotal in enhancing AWS's service offerings and expanding its market reach.

Revised Price Target Reflects Optimism

Citi has set a price target of $245 for Amazon shares, based on a valuation of approximately 16 times the estimated 2025 EBITDA of $157 billion, which translates to a 22.3% margin. The investment thesis is underpinned by Amazon's leading position in AWS and eCommerce, its robust Prime membership base, a growing online advertising business, and improving overall margins. The report emphasizes that Amazon's average EV/EBITDA multiple over the past decade has been around 18x, making the 16x multiple a conservative yet optimistic target. Citi maintains a "Buy" rating on Amazon, reflecting confidence in the company's long-term growth trajectory.

AWS's Technological Advancements and Market Dynamics

The driving factors behind Citi's positive outlook include AWS's technological advancements and the increasing demand for its services. AWS's new capabilities, such as Contextual Grounding Checks, are designed to reduce harmful content by 85% and hallucinations by 75%, significantly improving model accuracy. The introduction of memory retention and code interpretation for agents is expected to enhance customer support and expand use cases in data analysis and optimization. Additionally, AWS App Studio and Amazon Q Apps democratize app development, enabling non-technical professionals to create enterprise-grade applications swiftly. These innovations are anticipated to drive AWS's revenue growth, projected at 17.5% year-over-year for Q2 2024 and 17.3% for the full year 2024.

Citi's report also highlights Amazon's finalized $20 billion, 11-year deal with the NBA to stream games on Prime Video. This partnership, along with existing content like Thursday Night Football, is expected to differentiate Amazon's content offerings and drive Prime Video ad revenues. "Given our view that AWS’s GenAI Tools are gaining adoption and scale along with increasing demand for AWS’s services, we are incrementally confident in our AWS revenue projections," the Citi analyst notes.

Valuation Recap and Financial Outlook

Citi's valuation of Amazon at $245 per share is based on a 16x multiple of the projected 2025 EBITDA of $157 billion. This valuation reflects Amazon's strong market position in AWS and eCommerce, its expanding Prime membership, and a growing online advertising business. The report underscores that Amazon's historical average EV/EBITDA multiple has been around 18x, making the 16x multiple a conservative estimate. Key financial metrics include a projected 22.3% EBITDA margin for 2025, driven by operational efficiencies and expanding free cash flow margins.

However, the report also acknowledges several risks to this valuation, including macroeconomic factors such as rising inflation and potential recession impacts on consumer demand. Other risks include increased competition in the cloud sector, potential regulatory challenges in the U.S. and Europe, and the possibility of Amazon ramping up its investment cycle, which could impact margin expansion. Despite these risks, Citi remains optimistic about Amazon's long-term growth potential, driven by its strategic investments and technological advancements.

"We view Amazon as one of the best positioned companies in our coverage universe across some of the largest Internet growth vectors—eCommerce, Online Advertising, and the Cloud," says the Citi analyst.