JP Morgan Hikes Amazon Price Target To $535

In a report published Friday, JP Morgan analysts upgrade Amazon.com, Inc. AMZN from Neutral to Overweight. The price target has also been raised from $375 to $535. The upgrade is based on the company's improving profitability, acceleration in growth and the valuation of Amazon's AWS business.

According to JP Morgan, the company's recent results show that its heavy investments in Prime, category expansion and in its fulfillment and sortation centers are bearing fruit. The analysts believe that Amazon is now heading into a time where comps would become easier, given its consumption tax in Japan in 2014, as well as the aggressive price cuts in AWS.

"Our upgrade is based on 3 key factors: 1) accelerating FXN revenue growth to 22% driven by EGM strength; 2) increasing commitment to profitability with 60bps of Y/Y CSOI margin expansion to 3.1% with additional Retail room going forward; and 3) AWS profitability far exceeding expectations with mid-teens CSOI margins driving a re-rating and higher SOP valuation," the analysts explained.

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The company has reported robust Q1 results, despite strong FX headwinds, with 22 percent year-on-year revenue growth, which was ahead of the consensus and the estimates. The top-line outperformance was also significantly above the estimates. The upside was driven by acceleration in the EGM segment, both internationally and in North America.

The North American CSOI margin came in at 3.9 percent, up 120 bps year-on-year, representing the highest level of profitability witnessed by Amazon since 1Q12.

"After years of heavy investing, we believe Amazon now has a renewed focus on cost efficiency and productivity, and it is being more selective around new projects," the analysts added.

While the outperformance of the AWS segment was anticipated, the level of profitability reported for Q1 exceeded all expectations. The analysts now expect the Amazon's cloud business to remain competitive, with the company undertaking frequent price cuts, while the "improving scale and efficiency can help offset potential pricing pressures."