What you need to know – the crazy Motley

Every day, Wall Street analysts upgrade some stocks, degrade others and "pitch a blanket" on a few more. But do these analysts even know what they are talking about? Today we take a leading choice of Wall Street and put it under the microscope …

Stay with me while I throw you some numbers:

• Negative $ 241 million.
• $ 596 million.
• $ 2.4 billion.
• $ 3 billion.
• $ 10 billion.

These numbers are not random. They describe the y-axis on Amazon.comof (NASDAQ: AMZN) profits as they have gone from negative to almost vertical over the last five years. The technology technician's profits are climbing – and one analyst is very optimistic about Amazon.com's stock today.

Upgrading of Amazon

StreetInsider.com has the details. This morning, investment banker KeyBanc announced the improvement of the overweighting of Amazon shares and setting a price target of $ 2,100, or nearly $ 400 more, or 23% more than the current market.

KeyBanc has two main reasons for the upgrade of Amazon, which can usually be described as follows: retail and non-retail.

On the retail side, the analyst says Amazon is taking a number of steps to improve the profitability of its core business of selling content to people over the Web. Five years ago, this company kept the torch for the company, but it was not a profit factor because Amazon achieved operating profit of less than 1% on a single figure. annual business of more than 50 billion dollars. However, last year, Amazon North America earned operating profits of $ 7.3 billion on sales of $ 141.4 billion, a profit margin of 5.2%, seven times higher than what she had done five years ago.

Admittedly, Amazon's small international business is still losing money. However, the progress in North America's retail business is still impressive – and for KeyBanc, this is just the beginning.

Again, $ 241 million negative, $ 596 million, $ 2.4 billion, $ 3 billion, $ 10 billion. Amazon is "a pivot for a company with growing profitability," says KeyBanc. As this trend continues, the analyst sees the company exceeding expectations and increasing the profitability of its $ 5 billion retail sector, while creating a new grocery chain at lower prices than from Whole Foods to increase its reach.

Turbocharged growth

But that's not all that KeyBanc likes about Amazon. It is now well known that the Cloud Computing division of Amazon Web Services (AWS) is the real source of the company's largest profit margins.

Last year, AWS generated roughly the same benefits as Amazon's North America retail division ($ 7.3 billion). But AWS achieved a five times smaller sales base for the company, barely $ 25.7 billion. With a 28% operating profit margin north, AWS could be the real driver of the company's profits …if it can keep these AWS profits growing.

But here's the thing: although AWS is the production of high quality weapons, whose sales have almost doubled in the last two years, earnings At AWS, the sales growth rate was only more or less rhythmic – up 135% in two years. Assuming that AWS is already close to its profit margin, Amazon's only way to maintain its profits at a rate sufficient to justify its P / E ratio of 84.5 is to increase AWS sales much more quickly .

Fortunately for investors, that's what Amazon intends to do, says KeyBanc. Combining the growing advertising activities of AWS and Amazon, KeyBanc estimates that the company could achieve $ 100 billion in business ("by 2022," says TheFly.com), while maintaining growth rates and profit margin "very strong".

What this means for investors

So what is the result of all this for the shareholders of Amazon.com? I come from the KeyBanc upgrade with two main points:

First, the growth in Amazon's retail profit margins is not a coincidence, but rather an intentional and sustained move to increase profits. While the retail profit margin is not expected to increase sevenfold yet, adding $ 5 billion to KeyBanc's expected retail operating income would be equivalent to 68% growth in retail sales activity. North America.

At the same time, the growth of AWS and advertising may be even greater. If KeyBanc is right to say that business turnover is expected to reach 100 billion dollars in 2022, this would represent a fourfold increase in the size of Amazon's most profitable business in just three years . Assuming a uniform profit margin of 28% on these new revenues, this could yield $ 21 billion more profit of $ 5 billion in profits that KeyBanc already sees in retail.

If the analyst is right on all of this, Amazon's operating profit could exceed $ 38 billion (an increase more than three times) in three years – and Amazon could give Apple a serious race for his money for the title of the most profitable company in the world.