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Morgan Stanley analyst Brian Nowak reiterated Amazon.com Inc (NASDAQ:AMZN) with an Overweight rating and a $210 price target.

Amazon traded at 22 times Nowak’s 2026 free cash flow, representing growth of 29% (CAGR of free cash flow per share in fiscal 2024-2026). He said that on a growth-adjusted basis, this is a discount of about 30% to the median growth-adjusted multiple of Amazon’s mega-cap tech peer.

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The price target implies paying 20x FY2027 free cash flow for 24% growth (FY2025-2027 free cash flow per share CAGR) and 0.8x on a growth-adjusted basis, which represents a discount of about 20% versus Amazon’s mega-cap technology peers equates to a median growth-adjusted multiple of 1.1x.

Nowak noted the tactical risk to fourth-quarter EBIT, but expects weakness in fiscal 2025 as earnings challenges are temporary rather than structural.

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Nowak said Amazon’s increasing focus on lower-priced, lower-margin staples is putting pressure on merchandise margins, slowing the near-term surge in North American retail profit growth. Expected price reductions in a competitive holiday season are creating further uncertainty in the short term, he said.

According to the analyst, Amazon is making low-priced staples profitable and the cost of providing them still results in free cash flow of $8 to $9 per share. Corporate efficiencies could result in an additional $2 billion to $4 billion in savings, and Project Kuiper and headcount models suggest minimal headwinds here.

Nowak said Amazon management’s recent letter outlining an increased focus on efficiency should result in further EBIT cushion and upside in fiscal 2025.

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Project Kuiper should be manageable from a profit and loss impact perspective, Nowak said. He noted that Amazon’s growing net cash balance increases the likelihood of a return on capital in fiscal 2025.

Nowak forecast fiscal 2024 revenue of $633.96 billion and earnings per share of $4.80. He expects fiscal 2025 revenue of $697.94 billion and earnings per share of $5.93.

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This article, “Amazon’s Profitable Essential Merchandise, Efficiency Gains Set To Drive Growth: Analyst” originally appeared on Benzinga.com