Amazon Upgraded To Buy At Canaccord; 6 Reasons To Like The Stock

Canaccord Genuity’s Michael Graham upgraded the rating for Amazon.com, Inc. AMZN from Hold to Buy, while raising the price target from $60 to $750. The company has guided to a slower margin ramp going ahead than consensus expected, resulting in a decline of about 25 percent in its shares.

Graham highlighted 6 reasons to purchase Amazon’s shares:

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1. Core ecommerce business being poised to benefit from secular shifts – The analyst estimated ecommerce to currently constitute merely 7 percent of global retail.
2. Continued share gains with audience and fulfillment scale – Amazon is estimated to cater to about 80 percent of US ecommerce traffic, up from 74 percent in 2014. The company has deployed its cash to increase its fulfillment footprint globally over the last 5 years. “We believe these dynamics should help the company preserve its dominance,” Graham wrote.
3. AWS represents a significant tailwind to growth, margins and valuation – AWS share of Amazon CSOI is expected to grow from 36.5 percent in 2014 to 50 percent in 2020. “While price skirmishes may erupt in the short term, could computing is looking more like a two-horse rate [Amazon versus Microsoft Corporation MSFT] longer term,” the Canaccord Genuity report noted.
4. Scale-based incubation dynamic should extend the period of high growth – “AWS grew out of a core competency developed for internal requirements and then exported to customers; logistics services could be next,” the analyst mentioned.
5. Although there may be missed estimate revisions, investors are used to lumpy margin expansion – The revenue estimates for 2016-2017 appear too conservative and FX could turn from being a headwind to a tailwind after the latest Fed rate hike.
6. With the shares losing around 25 percent, the valuation appears “as reasonable as it has been in years.”