Amazon: An 'Unmatched Online Marketplace' - JP Morgan

JPMorgan upgraded the shares of Amazon (AMZN) 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 are 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 higher margin 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.

Comments

[Mule:]

What will happen to AMZN if they have to collect sales taxes on behalf of the states? With the states budgets in dire shape, this issue will surely come up in the new Congress.

Jan 05 02:43 PM

[Forex:]

Not much I think as Amazon already collects taxes (VAT) in Europe.


On Jan 05 02:43 PM Mule wrote:

> What will happen to AMZN if they have to collect sales taxes on behalf
> of the states? With the states budgets in dire shape, this issue
> will surely come up in the new Congress.

Jan 05 03:38 PM

[leapingcat:]

I think it is a little early to be bullish on Amazon. We have yet to see figures that show whether it gained volume over the holiday season at the expense of margins and profitability, it may face more competition from established specialists in the retail areas it is moving into, and you can argue that the potential benefits of its developing web services etc has been factored into its current p/e ratio. Amazon may well be a good long-term investment, but in the short term I can even see it bouncing back a little.

Jan 06 03:57 AM

[Louie Junior:]

January 2, 2008 (One Year Ago) JPMorgan’s Internet analyst Imran Khan and his team released a massive 312-page report this morning titled Nothing But Net that paints a bullish picture for the major Internet stocks (Google, Amazon, Yahoo, eBay, Expedia, Salesforce.com, Ominiture, ValueClick, Monster.com, Orbitz, Priceline, CNET, etc.)

How'd that come out, Imran -- Especially YHOO?

Jan 06 08:48 AM