Amazon price target boosted on margin potential ahead of Q2 earnings

Jefferies has raised Amazon's (AMZN) price target to $265 from $255, maintaining a 'Buy' rating, citing attractive valuation and anticipated margin resilience ahead of Q2 earnings. Analysts forecast a Q2 operating margin of 9.7% due to cost discipline and expect 17% year-over-year growth for AWS, noting increased AI workload adoption despite capacity constraints and near-term margin compression from infrastructure investments. The firm highlights robust core e-commerce, evidenced by strong Prime Day sales, and healthy advertising growth, suggesting continued upside.

Analysis

Jefferies has raised its price target on Amazon.com to $265, maintaining a 'Buy' rating, underpinned by a valuation deemed attractive at approximately 13x next-twelve-months EBITDA, which represents a 35% discount to its 15-year historical average. The analysis points to resilient operating margins, which are forecasted at 9.7% for the second quarter, driven by sustained cost discipline such as flat retail hiring and targeted headcount reductions in non-core divisions. While this margin forecast is below the Street's 10.4% consensus and a contraction from the prior quarter's 11.8%, the firm anticipates improvement in the second half of 2025. Revenue growth for Amazon Web Services (AWS) is expected to be 17% year-over-year, flat from the prior quarter due to capacity constraints, but underlying checks indicate healthy core cloud consumption and a pickup in AI workloads. The expected decline in AWS margins to 35.5% from 39.5% is attributed directly to increased capital investment in generative AI infrastructure. The core e-commerce segment remains robust, with a 30% year-over-year increase in Prime Day sales suggesting consumer spending is stable, despite a forecasted deceleration in online store revenue growth to 3%, which is attributed to tougher year-over-year comparisons rather than weakening demand.

Key Decisions for Investors

• Given the 17% potential upside to the new $265 price target and a valuation at a significant discount to its historical average, investors could consider the current share price an attractive entry point.
• Ahead of the July 30 earnings release, focus on the reported operating margin to see if it surpasses Jefferies' 9.7% forecast, and scrutinize management's guidance on the H2 margin trajectory and the timeline for easing AWS capacity constraints.
• Investors should monitor for any signs that AWS margin compression from AI investments is deeper than the projected drop to 35.5%, as this represents a key risk to the near-term profitability thesis.