Why Key Analyst Is Giving Amazon a Big Upgrade Now

If there is one company that Wall Street analysts are still largely in support of, it has to be Amazon.com Inc. (NASDAQ: AMZN). After all, Amazon is growing when the retail sector is suffering — and it also has that major growth engine of Amazon Web Services, with which the company is taking lots of share in the cloud.

Now we have one more analyst jumping on board for Amazon. The difference in this analyst upgrade, versus rival upgrades in the past, is that the move takes place after Amazon’s stock has pulled back sharply from its highs. Canaccord Genuity’s Michael Graham raised Amazon’s official stock rating to Buy from Hold. He also lifted Amazon’s target by some $150 to $750.

Graham effectively has issued six reasons why he now likes Amazon’s prospects. The call does admit that the firm regrettably missed last year’s big move in Amazon’s stock, but that was under the notion of being concerned that margins would expand more slowly than most analysts expected.

What has changed now is that Amazon did guide for a slower margin ramp from here. That and a very weak stock market helped lead Amazon’s shares down about 25% since the end of 2015. This has created a chance for Canaccord Genuity to upgrade Amazon shares and rejoin the majority of analysts.
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24/7 Wall St. recently showed how analysts were changing their price targets and valuations handily after the last earnings report.

Michael Graham’s six key reasons to buy Amazon stock have been detailed as follows (with Graham’s comments verbatim):

1. Core eCommerce business should continue to benefit from secular shifts: “We estimate eCommerce is currently only ~7% of global retail.”
2. Audience and fulfillment scale should lead to continued share gains: “We estimate Amazon touches ~80% of U.S. eCommerce traffic, up from 74% in 2014. Amazon has used its cash flow to quintuple its fulfillment footprint globally over the past five years. The company spent over $18 billion in 2015 on marketing and fulfillment operations combined. We believe these dynamics should help the company preserve its dominance.”
3. AWS is an important tailwind to growth, margins and valuation: “We estimate AWS share of Amazon CSOI should grow from 36.5% in 2014 to 50% in 2020. While price skirmishes may erupt in the short term, cloud computing is looking more like a two- horse race (Amazon vs. Microsoft) longer term.”
4. Scale-based incubation dynamic should extend the period of high growth: “AWS grew out of a core competency developed for internal requirements and then exported to customers; logistics services could be next.”
5. Estimate revisions may be mixed, but investors are conditioned for lumpy margin expansion: “For 2016-2017, we believe revenue estimates are likely too low and history suggests FX will turn from headwind to tailwind following the recent Fed rate hike. While margins should continue to expand, we retain some caution regarding the pace of expansion reflected in consensus.”
6. Stock is down about 25%, and the valuation is as reasonable as it has been in years” “We believe AMZN stock is unlikely to truly retreat into ‘value’ territory as long as top-line momentum is strong, and we expect this to persist for the foreseeable future.”

Canaccord Genuity also raised Amazon’s revenue and earnings per share (EPS) estimates. The firm’s 2016 and 2017 EPS estimates go from $9.14 to $9.60 for 2016 and from $12.70 to $14.49 in 2017. That $750 price target is actually a sum of the parts analysis that values Amazon’s eCommerce business at $450 per share and values Amazon Web Services at roughly $300.

Amazon’s stock had been higher on Thursday morning, but the market softness and slight selling bias had shares down 0.2% at $532.85 in late morning trading. Amazon shares still have a consensus analyst target price of about $738 and a 52-week range of $365.65 to $696.44.