Friday, January 30, 2009

A Victory Lap On Amazon But More Upside To Go

Back on December 19 (see write-up here), I suggested that Amazon's shares were undervalued and could appreciate by 20% over the next 12 months - they are up 18% today off the back of a stronger than expected earnings report. While any prudent investor would take profits here, including me (I am up 35% since getting in at the low $40s), I believe there is more upside at these levels and would continue to buy the shares.

As with my investment in Google (see write-up here), my Amazon investment highlights the value of sound fundamental research and proves that one can make money in this market on both the long and short side.

From Deutsche Bank Analyst Jeetil Patel:

Amazon's 4Q results demonstrated
Growth in revenues, profits bucking industry trends - BUY

We remain buyers of shares of Amazon.com, particularly as 28% unit
growth, 18% revenue growth and 3P growth reacceleration fueled
operating profit upside in 4Q. While the economic environment is
terrible, Amazon's business model and strategy continues to
outperform its retail AND Internet brethren. For 2009, we estimate
18% operating profit growth, with potential upside in 2H from a more
stable retail pricing environment (which could aid either margins or
growth). Our new price target is $65, or 25x 2010E EPS.

* 4Q upside from unit growth, 3P and fulfillment

Amazon.com beat our 4Q rev/EPS estimates by a healthy margin ($6.7bn/
$0.84 vs. $6.55bn/$0.65), on the heels of 3P growth re-acceleration
(+33% vs. +26% in 3Q) and excellent fulfillment cost management.
Unit growth of 28% was the highest among the big Internets, with
purchase frequency still up 10% Y/Y. Retail unit growth came in at
+26%, vs. +32% in 3Q, still suggesting that the company is
witnessing leverage against the cost structure. While operating
profit improvements are likely in 1H, we think that an improved
retail pricing environment sometime in 2009 could help fuel
incremental profit dollar growth this year.

* Raising 2009 estimates and introducing 2010 estimates

We are now forecasting 1Q09 revenues of $4.75bn (vs. $4.55bn
previously) and pro-forma (cash-tax) adjusted EPS of $0.46 (vs.
$0.44 previously). For 2009, we are now forecasting revs of $21.9bn
(+14%Y/Y) vs. $21.5bn previously. Our '09 proforma EPS forecast goes
to $2.31 vs. $2.24 previously (on a 20% tax rate). We also expect
$1.28bn in operating profit, or 5.9% margin in-line with our previous
forecast. We are also introducing 2010 estimates, calling for $25bn
in revenues (+14%Y/Y), operating profit of $1.59bn (6.4% operating
margin) & pro-forma EPS of $2.61 (+13% growth & 27% tax rate).

* Bumping Price Target to $65 ($57 previously)

Our new price target is $65 ($57 previously) based on 25x our 2010
pro forma EPS estimate of $2.61. While we fully acknowledge that our
earnings multiple is higher than sector averages, currently trading
at 15x 2010E earnings, we believe a premium is justified given the
company's continued fundamental growth in revenues and profit
dollars and the long term potential of its technology investments.
Risks include: increased competition from traditional retailers,
potential weakness in consumer demand, impact of marketing and
shipping initiatives.

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