UBS Hikes Amazon To Buy, Sees Optionality In China

In a report published Tuesday, UBS analyst Eric J. Sheridan upgraded the rating on

from Neutral to Buy, while raising the price target from $450 to $550, driven by growth in the Prime and Fulfillment by Amazon (FBA) businesses. Prime has seen strong subscriber growth of over 53 percent, year on year, in 2014. "The fast growing and higher spending Prime subscriber base has increased the importance of selling Prime eligible items, leading to greater penetration of the FBA offering within Amazon's base of 3P sellers," analyst Sheridan elaborated. In addition, the analyst believes that the consequent rise in Prime eligible product selection would lead to higher site conversion, along with increased annual spend per customer and eventually higher gross merchandize value levels for the company. The analyst also believes that there could be further upside potential, driven by the expected fulfillment leverage, with expectations of Amazon slowing its fulfillment center expansion and with added leverage from the further rollout of Amazon Robotics, which could dave over $900 million in personnel costs, annually. Also, the analyst believes that AWS would sustain its dominant position in the Infrastructure-as-a-Service (IaaS) market, while the company expands this business into other IT arenas. The analyst also expects optionality associated with Amazon's position in China. The FY2015 revenue, gross margin and CSOI estimates have been raised from $102.7 billion, 32.4 percent and $2.6 billion to $105.2 billion, 32.6 percent and $3.3 billion, respectively. The FY2016 revenue, gross margin and CSOI estimates have been raised from $121 billion, 33.3 percent and $4.1 billion to $126 billion, 34.9 percent and $5.6 billion, respectively.