JPMorgan Upgrades Amazon To Buy From Hold

JPMorgan upgraded the shares of Amazon to Buy and set a $65 price target. The price target represents a 20% upside from current trading levels. Sounds familiar? On Dec. 19th I suggested that Amazon is taking share from rivals and that the shares could appreciate by 20% over the next 12 months. See the write-up here.



Despite the upgrade, the analyst reduced both his 4Q08 and 2009 numbers for Amazon citing economic pressures that is impacting both revenues and profits. But driving the shares will be share gains, impact from offline retail bankruptcies, and uptake of digital downloads and web services.

From JPMorgan Analyst Imran Khan:
We are upgrading Amazon.com to Overweight from Neutral. Although we believe a
tough consumer environment may hamper spending in the near term, in the medium
to longer term, we see Amazon continuing to take share within eCommerce even as
eCommerce continues to outpace overall retail growth. Our 12-month price target for
AMZN is $65.

• Amazon is a net share gainer. eCommerce is gaining share – and Amazon is
gaining share within eCommerce. Through the first 9M’08, US retail sales rose
2%, US eCommerce grew 8%, and Amazon North America retail revenue was up
31% Y/Y. We expect these relative trends to continue through F’09, with
eCommerce growing faster than retail and Amazon outgrowing eCommerce.

• Amazon is diversifying its business. The company has added more product lines
(e.g., office products), continues to expand its geographic footprint, and is
aggressively pursuing revenue streams not derived from physical sales from
inventory: third-party sales, digital media sales and Web Services. We think
Amazon is establishing itself as an unmatched online marketplace, and its highermargin non-retail businesses could boost profitability in the medium to long term.

• Low Cap-Ex model driving solid FCF generation. Since 2Q’07, Amazon’s
TTM CapEx has been at or below 25% of operating cash flow, a trend we expect
to continue. While we think operating margins are likely to stay in the 5% range
in the medium term, we believe Amazon can continue to produce solid FCF
growth, up 57% in F’09 and 42% in F’10.

• 2009 drivers. In our view, the following factors will drive shares in 2009: (1) the
impact of the economy on retail and eCommerce spending, both in the US and
abroad, (2) Amazon’s ability to take share within eCommerce, (3) the impact of
brick-and-mortar retail bankruptcies, and (4) customer uptake of digital download
and web services businesses.

• Adjusting 4Q’08 estimates. We are lowering our 4Q’08 revenue, EBITDA and
EPS estimates, to $6.25B, $376M and $0.35 (from $6.65B, $407M and $0.40), as
we expect the tough environment to result in slower revenue growth and add
pricing pressure this quarter; we are also lowering our F’09 revenue, EBITDA
and EPS forecasts due to our anticipation of a longer, deeper recession that we
previously saw.