B. Riley Upgrades Amazon To Buy, Sees Margin Gains As 'Structural'

In a report published Friday, B. Riley analyst Scott Tilghman upgraded the rating on

from Neutral to Buy, while raising the price target from $428 to $646, after the company reported its 2Q results significantly ahead of expectations. Amazon's 2Q revenues, operating profit and earnings were all higher than expected. Segment growth, NA, International and AWS, beat expectations, and helped the company record revenue of $23.18 billion, versus consensus expectation of $22.4 billon and B. Riley estimate of $22.5 billion. The company was able to offset operating expenses with gross margin strength. While the consensus and B. Riley estimates were of a loss, Amazon reported EPS of $0.19, despite a high tax rate. Analyst Scott Tilghman commented, "Looking ahead (and despite ongoing FX headwinds through 2H), we see few impediments to sustained revenue growth, and expect recent gross margin improvements to remain largely intact aside from planned content spending in 2H." The EPS estimates for FY15 and FY16 have been raised from $0.91 to $2.24 and from $2.93 to $6.72, respectively. "The upside is a function of mix-driven gross margin improvement and stability (relative to revenues) of operating expenses," Tilghman wrote. While pointing out that the company had demonstrated through the last couple of quarters its ability to "drive high margin AWS revenue as well as better monetizing its geographic," Tilghman noted that Amazon is expected to generate higher FCF, since margins appeared to be "on the upswing," with growth trends likely to continue and 3P mix was rising.