Amazon has been building out its fulfillment infrastructure for some time, and investors had grown tired of all that investment with no returns. However, that could be about to change. Also opportunities for Amazon Web Services and in China provide more runway for growth, according to analysts at UBS.

Amazon.com, Inc. Edges Upward After UBS Upgrade

Amazon Prime to boost revenue

In a report dated today, UBS analyst Eric Sheridan and his team said they upgraded Amazon from Neutral to Buy and raised their price target from $450 to $550 per share. One of the reasons they give is the “flywheel” the online retailer is creating through growth in Prime subscribers. Last year, the segment climbed 52% year over year. Here’s a look at recent trends in Prime membership growth (All graphs in this article are courtesy UBS.):

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The Amazon Prime segment has become increasingly important for the company over the last couple of years, and not just because of subscriptions. The segment has also driven higher spending on the website as Prime subscribers tend to order more than non-subscribers.

Fulfillment by Amazon also a positive

The UBS team believes that as the number of Prime subscribers rises, it becomes more and more important to increase the number of items which are eligible for Prime shipping. About 256 million of the items available on Amazon from third-party sellers are not using Fulfillment by Amazon, but they think “a subset” of these items will move to make their items eligible for Amazon Prime.

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The number of FBA sellers increased 65% last year, which was about flat with 2013’s growth. Further, the number of units that are eligible for FBA climbed 50% during the 2014 holiday shopping season. Growth of FBA was also strong in the first quarter of this year, according to the UBS team:

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The result of this push to increase the number of Prime-eligible items should also further increase penetration of the Fulfillment by Amazon service among third-party sellers.

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Additionally, it should also result in an even greater increase in conversion, annual spend per customer, and gross merchandise volume. The analysts said their recent conversations with members of the industry suggest that Amazon is slowing down the pace at which it is expanding its fulfillment center infrastructure. As a result of the slowdown, Amazon should see fulfillment costs decline.

Indeed, this is good news if it is accurate and could provide upside following the online retailer’s next earnings report. Investors could see the slowdown as a big positive because in recent quarters they have been disappointed by continued losses that were the result of that expansion.

Amazon Web Services offers even more opportunities

The UBS team also expects Amazon Web Services to remain the dominant player in infrastructure-as-a-service and continue expanding into other related areas of IT spending.  They expect the segment to provide an upside surprise in the company’s next earnings report compared to consensus estimates for the segment.

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They note that the IT industry has grown by about 49% over the last five quarters, which makes the sector a great place for Amazon to be in.

Amazon could buy into JD.com in China

And finally, they see great options for Amazon in China, which the analysts think could result in an equity stake of 3% to 9% in JD.com. They believe this move could help the U.S.-based online retailer cut its losses in the country.

“With de minimis market share and a negative impact on profitability within the International segment, we would applaud any move by Amazon to curb margin drag while maintaining its exposure to the long term eCommerce trends in China,” the UBS analysts wrote in their report.

As of this writing, shares of Amazon were up 2.24% at $465.77 per share.

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