Stocks

Amazon.com, Inc. Upgraded For “Reasonable” Valuation

Amazon.com, Inc. (NASDAQ:AMZN) was one of 2015’s most popular stocks, although this year has so far brought a pullback as investors shy away from the biggies in a broad-based selloff. Because of this year’s more than 20% decline year to date and six key dynamics that should lead to growth this year, Canaccord Genuity analysts have upgraded the stock, calling it “as reasonable as ever.”

Amazon.com, Inc. Upgraded For "Reasonable" Valuation

No worries about Amazon’s guidance

Aside from the general weakness in the market, Amazon shares have also been dramatically impacted by management’s outlook for a slower than expected ramp of margins. Indeed, guidance has been the big impetus for stock price movements across Wall Street so far this year as companies that beat estimates in the fourth quarter have been punished heavily for weak guidance.

Analysts Michael Graham and Austin Moldow said in their report dated Feb. 17 that they had been concerned about a weaker than expected margin ramp before Amazon released its latest earnings report, so they weren’t really surprised by the company’s commentary regarding margins. They have now upgraded Amazon stock from Neutral to Buy and raised their price target from $600 to $750 per share, giving several reasons they like the stock.

Amazon’s e-commerce business going strong

Of course Amazon’s core business is at the heart of its earnings results, and the Canaccord Genuity team says it shows no signs of slowing down. The online retailer should particularly benefit from secular shifts in shopping from offline to online. Currently, they estimate that e-commerce accounts for just about 7% of the world’s total retail spending.

In the U.S., they estimate Amazon’s e-commerce traffic share at about 80%, which is an increase from 74% in 2014. Part of the company’s strategy has been to expand its fulfillment infrastructure, and it has been rapidly spending its cash flow to do this. The analysts said that so far, the online retailer has managed to quintuple its global fulfillment footprint over the last five years, spending more than $18 billion last year alone on both fulfillment operations and marketing.

They believe that the move to expand its fulfillment footprint was a wise one and that it should help Amazon not only continue to dominate the e-commerce space but also steal share from competitors.

Amazon Web Services also going strong

The Canaccord team also highlighted Amazon Web Services, which most analysts are keeping an eye on because of its rapid growth and the revenue it adds to the company’s top line. The analysts estimate that the company’s cloud business will skyrocket over the next five years, climbing from 36.5% of the company’s total consolidated operating income to 50% in 2020. They’re not worried about competition in the cloud space either as they think the only company that will be able to rival Amazon there is Microsoft, which they think will simply share the vast majority of the cloud industry’s revenue.

The analysts also think Amazon will see an extended period of high growth based on its “scale-based incubation dynamic,” noting that the cloud business “grew out of a core competency developed for internal requirements and then exported to customers.” They suggest that logistics might be the next area of expansion.

The online retailer’s shares were down 0.05% at $533.82 at around 11:16 a.m. Eastern today.

 

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