Amazon’s (NASDAQ:AMZN) Project Kuiper seeks to provide broadband internet to underserved areas by deploying thousands of satellites in low Earth orbit (LEO), which spans up to 2,000 kilometers above Earth.
The initiative was launched in 2018, and didn’t draw too much investor attention until the ecommerce giant noted its impact on 2Q24 margins. After testing two prototype satellites in 2023, Amazon began full-scale production of its LEO satellites this year and plans to start launches in early 2025.
As that milestone approaches, Bank of America analyst Justin Post, ranked in the top 1% of Wall Street stock experts, cautions that cost concerns are “elevated.”
So, how much will it cost, then? Based on various public industry estimates and excluding the cost of consumer equipment on the ground, Post reckons Amazon could spend $16 billion to fully establish its satellite network, with the bulk of that cost coming from space launches. In the near term, Post estimates Amazon will spend $1 billion and $3.5 billion on the network in 2024 and 2025, respectively, though the company could start “capitalizing costs” in the second half of next year, potentially reducing estimated opex (operating expenses) to $1.8 billion in 2025. “Assuming a 5-yr replacement cycle and 60% gross margins, we estimate Kuiper needs ~7mn subs to breakeven on annual replenishment cost,” the 5-star analyst opined.
Considering there are 2.6 billion people across the globe without broadband access, that’s a big TAM (total addressable market) and Fortune Business Insights projects a potential global revenue of $26 billion by 2032. However, there are various challenges to consider such as limited disposable income among the unconnected population, established competition (like Starlink), substantial upfront investment, and high ongoing costs. On the other hand, there are potential pluses; for instance, Amazon’s logistics network, which includes autonomous vehicles, trucks, drones, and delivery robots, could benefit from a continuously available, connected network. “Still,” Post went on to add, “with Kuiper losses expected to grow, and Amazon’s market cap over $1.8tn, we think it will be years before any Kuiper related market cap expansion is possible for AMZN.”
All told, Post rates AMZN shares a Buy, backed by a $210 price objective, which implies a ~14% upside potential from current levels. (To watch Post’s track record, click here)
Turning now to the overall Street view on AMZN, 2 of Post’s colleagues are sitting this one out for now with Hold ratings, but all 46 other reviews are positive, providing the stock with a Strong Buy consensus rating. Over the next 12 months, the shares are expected to appreciate by 19%, considering the average target clocks in at $224.16. (See Amazon stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
