Amazon’s Surprise Profit Triggers Multiple Price Target Increases

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Amazon pleasantly surprised Wall Street with a profit instead of a loss last night, and shares surged immediately after the results were released. Today the stock rose as much as 6.93% to $603 per share, and analysts are expecting the stock to climb even higher.

Multiple firms upped their price targets for the online retailer, although at least three left their targets the same.

Amazon sees strong performance across segments

Amazon’s revenue climbed 23.2% year over year to $25.4 billion, beating the consensus estimate of $24.9 billion. On a currency-neutral basis, revenue rose 30% year over year, which was the highest level of growth in three years. Revenue from Amazon Web Services, which analysts from pretty much every firm have been watching closely, skyrocketed by 78% and hit an operating margin of 25%.

The company recorded a 28% increase in revenue in North America and a 24% increase in international revenue on a currency-neutral basis on the back of strong growth in India. Amazon held its very first Prime Day during the third quarter, which it billed as having more deals than last year’s Black Friday, and management said that single day of sales contributed 200 basis points of acceleration in growth.

Amazon’s investments paying off

Amazon has spent the last several years pouring more and more cash into expanding its logistics, infrastructure and web services, and Goldman Sachs analyst Heath Terry notes in his Oct. 23 report that these investments are finally starting to pay off. He believes all those investments are driving an acceleration in market share in addition to growth in cash flow and high returns on invested capital.

As a result, he maintained his Conviction List Buy rating on Amazon but increased his price target from $680 to $760 per share. He also upped his estimates for revenue and adjusted EBITDA between this year and 2017.

More growth expected for Prime

Macquarie Research analyst Ben Schachter said in his Oct. 23 report that he has increased his price target for Amazon from $660 to $740 per share and affirmed his Outperform rating. He agrees with Terry in saying that the infrastructure investments are finally paying off. He believes all those investments will enable Amazon’s Prime service to continue growing.

The subscription service beat expectations, and he expects this to continue, especially since a “meaningful competitive response” to its success has yet to make an appearance. He believes at least one-quarter of households in the U.S. already subscribe to Prime. He says that “conservatively, he thinks at least half of U.S. households will subscribe within the next five years.

Morgan Stanley analyst Brian Nowak also upped his price target for Amazon, pushing it from $740 to $750 per share. He maintained his Overweight rating on the stock, also mentioning the strength in the Prime service and emphasizing that despite continued aggressive investments, Amazon is still able deliver improving profitability.

He also mentioned the acceleration in same store sales growth, which he thinks will result in “a period of sustained, rising profitability.” He noted that retail gross profit dollars per customer accelerated to post a 27% year over year growth rate, marking the fastest growth ever. It’s also 2.5 times the long-term average of 11%. He sees this metric as a proxy for retail same store sales and attributes its growth to growing Prime adoption because Prime members spend more on Amazon.

Analysts didn’t have much negative to say about Amazon’s earnings report, although Schachter said it’s unclear whether the high margin on Amazon Web Services is sustainable. Also the international business continues to lose money, and Amazon has not defined its investments in non-core areas.

Other price target increases for Amazon

Deutsche Bank analyst Ross Sandler also upped his price target for Amazon, pushing it from $665 to $725 per share. Although he noted that the online retailer’s shares are drifting higher, he thinks they are “due a breather as margins level out a bit in 2016,” although he doesn’t believe this will be a surprise. He remains Buy-rated on Amazon.

Stifel analyst Scott Devitt maintained his Buy rating but raised his price target from $700 to $750 per share in the wake of last night’s earnings report. He thinks the company has finally emerged from its investment cycle and is now “well-positioned to expand its competitive advantages through the Prime platform, enhanced logistics and AWS services.” He also believes that last night reports indicates that the online retailer “has reached a critical level of scale which allows it to build a robust global ecosystem while maintaining profitable top-line growth.”

Raymond James analyst Aaron Kessler also upped his target price for Amazon, pushing it from $640 to $745 per share, and maintained his Strong Buy rating.

Barclays, Jefferies, Nomura leave price target

Barclays analyst Paul Vogel, Nomura analyst Robert Drbul, and Jefferies analyst Brian Pitz were among the few analysts (of those whose reports we reviewed) who left their price targets the same. Vogel continues to peg his target at $700 per share and maintained his Outperform rating on Amazon.  Like Schachter, he mentioned Prime as an important contributor to the online retailer’s growth, naming it as possibility the biggest driver of acceleration. He also sees Fulfillment by Amazon as a revenue tailwind, especially in international markets.

Pitz maintains his Buy rating and $730 per share price target on Amazon. The focus of his Oct. 22 report wasn’t the company’s earnings, but rather the reports that it “is getting serious” about moving last-mile fulfillment in house. We’ve been hearing speculations about this for about the last 18 months, and now media outlets are reporting that Amazon has hired an executive search firm to create a management team for the effort.

The Jefferies analyst sees this as an important step in the company’s fulfillment strategy as it continues to improve the experience for shoppers. He noted that Amazon already offers a number of expedited delivery options, including same-day and even one-hour deliveries, so moving last-mile delivery in house makes sense. Doing this enables the company to better control the delivery experience as well.

Drbul continues to rate Amazon as a Buy with a $700 per share price target. He continues to like Amazon Web Services as a “major growth opportunity,” noting that the business has added 530 new “significant” features this year.

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