Gene Munster Sees An Attractive Entry Point In Amazon

• Amazon.com, Inc. AMZN shares have appreciated 92.49 percent over the last one year, rising to $693.97 on December 29.
• Piper Jaffray’s Gene Munster has maintained an Overweight rating on the company, with a price target of $800.
• Munster believes that there is an attractive entry point into the stock at present, given that the company is capable of investing in its business and expanding margins

Analyst Gene Munster elaborated that he was bullish on Amazon prior to the December 2015 quarter results, based on “1) concerns over margin compression returning from AWS & fulfillment expansion are misunderstood, 2) Street estimates are mis-modeling margin expansion in 2016, and 3) unit growth will likely exceed expectations.”

Munster also mentioned that investor concerns regarding potential margin reinvestment by Amazon were overdone, and that the company does not “pendulate” on profitability, contrary to market perception.

“While many believe 2015 margin expansion was due to Amazon cutting back expansion plans and R&D experiments, we believe it is due to Amazon's $10B of gross profit growth, its first year of fulfillment leverage, and massive Prime adoption,” Munster stated.

For 2016, Munster believes that the reported fulfillment and AWS expansions would not significantly impact margin expansion. In fact, the company is expected to achieve 240bps of operating margin expansion through the year.

According to the Piper Jaffray report, “Lower retargeting expense for new Prime members, AWS's growing share of revenue, expansion of robotics, mixshift towards 3P sales, leveraging India infrastructure, and higher margin revenue sources should enable this.”

In addition, Piper Jaffray’s Amazon Search Index suggests the unit growth during the December 2015 quarter was in the range of 24 to 26 percent, although investors appear to be expecting unit growth of 22-24 percent.

Also, Amazon is likely to have “continued to add new Prime users at an impressive rate,” with 8-10 million additions estimated for the December quarter.