Citi On Why Amazon Is Surprising The Critics

Amazon.com, Inc. AMZN reported its 1Q results ahead of expectations. Citi’s Mark May maintained a Buy rating for the company, while raising the price target from $760 to $780. The analyst commented that “too many investors remain skeptical of Amazon’s near-, mid-, and long-term earnings power.”

Amazon’s gross profit came in 5 percent above the Citi estimate, while GAAP EPS was 32 percent higher. The company generated Retail revenue growth of 27 percent y/y [ex-FX]. AWS growth came in at 64 percent y/y, which was in-line with expectations.

Despite bear concerns, Amazon’s retail margins were better than expected, while AWS margins were in-line, albeit recorded at a robust 28 percent, analyst Mark May noted.

Citing the company’s continued solid revenue growth and margin expansion, especially in Retail, May forecasted FCF of $9.5bn for 2016 and of $13.5bn for 2017. He expects the company’s business to trend towards generating adjusted EPS of ~$20 in CY18.

Estimate Changes

Amazon has a history of reporting its revenue and CSOI at the high-end of guidance, May mentioned, while adding, “In fact, Amazon has reported rev above the midpoint in 17 of the last 20 quarters, and has exceeded the mid-point of CSOI guidance in the past 10 quarters.”

The revenue and CSOI estimates for 2Q16 have been raised by 3 percent and 5 percent, respectively. The EPS estimates for 2016, 2017 and 2018 have been raised from $4.85 to $4.98, from $7.70 to $7.83 and from $11.22 to $11.34, respectively.

“We believe the company is positioned well relative to a number of growth vectors in the Internet sector and see upside to shares considering its compelling growth versus industry peers and its reasonable valuation on a SOTP basis,” May added.