Technology
Why Merrill Lynch Sees 45% More Upside in Amazon Shares
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Amazon.com Inc. (NASDAQ: AMZN) has long been on the path to offer something for everyone. Despite having dipped on the heels of the November 8 presidential election results, Amazon shares have been coming back. Now Merrill Lynch sees an already aggressive price objective going even higher — some 45% higher!
Justin Post of Merrill Lynch reiterated his Buy rating on Amazon on Wednesday, and the analyst raised his price objective to $1,125 from an above-consensus target of $960. If he is proven correct, that would represent upside of about 45% from the $774.3 closing price.
While this is substantial upside, the street-high price target on Amazon shares is actually $1,250.
Post sees Amazon as growing at one of the fastest rates in the industry, on both gross merchandise value and on cloud revenues. He sees Amazon as having the least amount of long-term disruption risk, while also having the most attractive long-term risk/reward scenario among mega caps.
While first-quarter and second-quarter margins are a notable risk from content and fulfillment expenses at the same time that sales are seasonally soft, Merrill Lynch thinks the street will look past the issues if the top-line trajectory remains solid, and the outlook is for margins to improve in 2018. Post said:
We think the stock will benefit from a healthy economic backdrop exiting 2017 and are increasing our price objective to $1,125 as we roll our estimates forward to 2018. Our $1,125 price objective values the retail business at 0.9 times gross merchandise value and Amazon Web Services (AWS) at 5.5 times revenues; 10% to 25% premiums to peer groups due to higher growth. We are shifting our valuation to 2018 estimates as per our normal methodology, for the stocks under our coverage.
Merrill Lynch sees 2017 revenue and EBITDA of $166 billion and $17.9 billion, compared with street estimates of $168 billion and $20.1 billion, respectively. The EBITDA forecast is lower than consensus because of a cautious stance on gross margin and higher operating expenses. The analyst sees pressure on margins coming from incremental investments in India, fulfilment capacity, local delivery, possibly stores and video content.
For 2018, Merrill Lynch has estimates of $197 billion in revenue and $21.6 billion in EBITDA. That compares to the $203 billion in revenue and 25.3 billion in EBITDA consensus estimates. Several positives were named for the bullish cases and as catalysts for the stock:
- Greater customer lock-in from fulfillment and content initiatives
- Overall cloud strength versus peers continues, despite competitive concerns
- Continued traction in India
- Ramp in new categories (B2B, auto parts, local stores) enabled by local delivery capabilities
- Opportunity for year-over-year margins to improve in 2018 on easier comps
Merrill Lynch’s investment rationale says:
Amazon is an eCommerce leader with market share and margin potential stemming from its global scale, fulfillment footprint and technology platform investments. We think Amazon’s focus on the customers and the buyer experience is right for the Internet, and we consider Amazon a transformational company. We think Amazon is well positioned to capitalize on the global growth of eCommerce and other secular trends such as cloud computing, online advertising, connected devices, and mobile commerce.
Some risks were also given here that could hurt Amazon shares. Those were listed as follows:
- High investment spending
- AWS competition
- Growing international segment losses
- Regulatory challenges
- Stretched tradition valuation metrics
One thing to consider is that Amazon shares were trading at $787.75 on November 8, election day. They dropped to $719.07 by the close of November 14, and since recovering they have traded mostly in a range of $745 to $780 since. One issue that has been a drag on the stock is that Donald Trump had called Amazon out over antitrust issues on how dominant it was becoming (and tangled with Bezos’s Washington post), and that would fall under Merrill Lynch’s regulatory risk as a caveat.
Amazon shares were last seen trading up just over $1.000 at $775.50 on Wednesday morning. Amazon shares have a 52-week range of $474.00 to $847.21, and they had a consensus analyst price target of $925.07 coming into this call.
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