Axiom Highlights Amazon's Three Secular Tailwinds: E-Commerce, Cloud, Ads

• Shares of Amazon.com, Inc. AMZN have seen a steady rise year-to-date, peaking at about $537 in the beginning of August and continuing to trade close to that level since.
• Axiom’s Victor Anthony maintained a Buy rating and price target of $650, while remaining bullish regarding the company’s prospects.
• Anthony stated that there are three secular tailwinds that Amazon continues to benefit from: e-commerce, could computing and advertising. AWS is expected to drive meaningful long term free cash flow and ROIC growth for the company.

Analyst Victor Anthony expects the company to be able to grow revenues at a three-year CAGR in the upper-teens, while being able to drive operating margin expansion despite investing in growth.

With regard to AWS, Anthony believes that “[p]rice has been a factor for customer ads and stickiness, but breadth and depth of product and operational track record play a major role in locking in customers.”

However, given that this business opportunity is still in its nascent stage, Amazon would need to make further investments. Although the company’s margins were affected by the sizeable price increase in 2014, operating margins have been successfully brought back to the 20 percent range in 2Q15 via efficiencies.

In addition, “Prime is becoming an even more important part of Amazon’s business model and the focus is on driving more Prime customers,” the Axiom report stated, adding that video was key to the Prime strategy.

Customers who use video during the free-trial period have been found to upgrade to paying memberships of Prime at a higher rate, while video users also renew their membership at a higher rate.

“Original programming is becoming a main reason why people come to Prime Video, and Amazon says it will continue to invest in exclusive content,” Anthony reported.

India has proven to be Amazon’s fastest growing market, and the company is now “even more bullish” on its prospects in the country. Amazon intends to continue to invest aggressive in India, a county that is still in the early days of e-commerce.