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4 Questions Amazon Must Answer

4 Questions Amazon Must Answer
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Analysts at Morgan Stanley remain bullish on, Inc. (NASDAQ: AMZN) heading into its next quarterly report. The firm includes Amazon on its "Best Ideas" list, with an Overweight rating and a $430 price target.

Morgan Stanley outlined four questions that it hopes Amazon will answer, framed within its main thesis: Amazon's core North American retail business is more profitable than investors think. Here are the four questions, along with the analysts' take on them.

  1. How (un)profitable is Amazon Web Services? Morgan Stanley thinks that AWS led to a loss of $1.3 billion in consolidated segment operating income (CSOI), a greater loss than most investors expect.
  2. Is North America retail already more profitable than Walmart? Morgan Stanley said it believes so. The analysts view larger-than-expected losses in AWS as a net positive, implying "higher N. American retail profitability." The analysts believe that N. American retail is operating at a 8.2 percent EBITDA margin, above Wal-Mart Stores, Inc. (NYSE: WMT).
  3. What was the impact of the AWS 7-40 percent price cuts? Insight into how AWS was profitable before the April 2014 price cuts will give investors the ability to forecast how the segment can be profitable as those cuts expire, Morgan Stanley said.
  4. Will Q2 CSOI guidance indicate improving profitability? Morgan Stanley said it is "particularly encouraged" by Amazon's Q4 fulfillment leverage, which it forecasted would "drive higher earnings power." The risk here, Morgan Stanley opined, is to the upside.

Related Link: Morgan Stanley On eBay: 'Spin Is In, But Now What?'

In closing the note, the analysts raised estimates by 1 percent and raised the price target by $15 to $430.

Shares of Amazon closed Friday at $375.56. Shares are up more than 20 percent year-to-date.

Latest Ratings for AMZN

Oct 2016Goldman SachsMaintainsBuy
Oct 2016Credit SuisseMaintainsOutperform
Oct 2016Morgan StanleyMaintainsOverweight

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