Argus Upgrades Amazon To Buy, Sets $935 Target

The growth prospects of Amazon.com, Inc. AMZN seem to be “accelerating more rapidly than the share price,” Argus’s Jim Kelleher said in a report. He upgraded the rating on the company from Hold to Buy, while establishing a 12-month price target of $935.

Amazon’s shares have gained 17 percent year-to-date, versus a 6 percent gain in the S&P 500 and a 4 percent gain “for a basket of internet service providers in Argus coverage,” Kelleher mentioned. He added that based on a historical comparables analysis and discounted free cash flow valuation, Amazon’s current share price represents “a favorable entry point.”

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Superior Growth At AWS

Amazon Web Services has been an important growth driver for the company. In 1H 2016, AWS recorded operating margin of ~26 percent, compared to ~6 percent for North American Retail and less than 1 percent for International retail, Kelleher noted.

AWS appears to be on tract to accounting for more than 40 percent of the company’s total operating income in 2016, although this segment accounts for only 9-10 percent of total revenue. Based on its superior growth rate, AWS may contribute more than 45 percent of the company’s total operating income in 2017, while pushing non-GAAP operating margin above 7 percent, the analyst stated.

Buy Amazon

Amazon once again posted solid results in Q2, with sales growing 31 percent, significantly ahead of the performance recorded by its ecommerce competitors.

“We expect ongoing volatility in the shares, given the company’s sensitivity to the holiday shopping season and need to invest in growth initiatives such as AWS and Prime. Given the company’s indisputable franchise leadership, its ability to leverage its vendor relationships in the retail space, and its market dominance and superior growth in infrastructure-as-a-service, we believe AMZN warrants long-term accumulation in most equity accounts,” Kelleher wrote.

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