Amazon Needs To Be A Core Holding For Internet And Growth Investors Alike

Despite a weaker-than-expected earnings report, with a big miss on EPS, UBS analyst Eric Sheridan is still bullish on Amazon.com, Inc. AMZN.

“Going forward, while the stock may take a pause to digest lower profit estimates, we think Amazon's strategic positioning in two long runway markets (eCommerce & cloud) present a stock that is a core holding for growth/Internet investors,” Sheridan wrote.

Sheridan has a Buy rating and $1,200 price target on Amazon (see Sheridan's track record here).

Q2 Results Had Positive And Negatives

Amazon’s Q2 was not horrendous, as the company reported a jump in profit and showed no signs of slowing down. Specifically, Amazon posted Q2 revenue of $38 billion, which was up 25 perfect from a year ago.

However, the earnings call was not full of positives. Amazon saw a 77 percent drop in quarterly incomes, and management highlighted it could lose $400 million in operating profits. This helped send shares falling over 3 percent during Thursday’s post-market session.

Related Link: Amazon Misses EPS Estimates, Stock Falls

Reflecting on the Q2 earnings call, Sheridan wrote: “In our view, Amazon's Q2 results were a dual edged story: revs which surprised to the upside across the board offset by disappointing operating income in Q2 & forward guide. Given the last few months, this shouldn't come as a surprise to long-term investors – Amazon is squarely focused on the Prime flywheel, expanding categories & geographies and continuing to maintain leadership in cloud. We tilt toward historical norms that if revenue is in an arch of surprising to the upside then the profit narrative is likely to take a backseat.”

Can Amazon Continue To Drive Top-Line Growth?

Sheridan expects Amazon to continue to outperform market expectations as he believes “strong Prime member growth, and fast seller FBA adoption will continue to advance Amazon's Prime + FBA flywheel effect that is likely to be supportive of a ~20% rev growth CAGR ('16-'21E). Further, Amazon will likely focus on insourcing & controlling more of its own logistics (shifting more to fixed costs from variable costs) for 1P goods & its 3P merchant partners.”

Overall, as Amazon continues to capitalize on growth opportunities, Sheridan expects the company to grow at a 20 percent revenue CAGR and to beat estimates going forward.

At time of publication, shares of Amazon were down 3.49 percent at $1,009.51.

To take a deeper look into Amazon’s earnings report and read the latest financial news, check out Benzinga Pro.