3 Reasons Why Mahaney Thinks Amazon Can Go Higher

At least somebody is getting a V-shaped recovery.

Back in early November, Citi analyst Mark Mahaney downgraded Amazon (AMZN) which made some sense at the time since its shares were slumping and the company was slashing guidance. He downgraded at $52, and by Nov. 20 shares had fallen to around $35.

But then a funny thing happened: Amazon shares came roaring back.

Since the start of the year, Amazon shares have already rebounded more than 50 percent to just above $78. After that run (which, compared to the rest of the market, could easily seem overheated) is it time to pare back? No, says Mahaney. Unlike other recent upgrades, he says Amazon isn't "things are getting Less Worse" call. Below we sum up his 3 reasons to keep buying AMZN:

1) Margins could recover faster than expected. Lower retail discounting, more efficient operations and a better return on marketing cash could all help push results above expectations.

2) Who else are you going to buy? Mahaney says Amazon's organic revenue growth is likely to hit 23 percent, about double Google's (GOOG) and a world away from falling revenue at eBay (EBAY) and Yahoo (YHOO).

3) Top-line growth may be more sustainable. International growth, less competition (eBay again), and, yes, the Kindle, could all surprise on the upside, he says.

The stock is pricey, no doubt. But here's Mahaney's valuation case:

AMZN has the highest P/E (40X on ’09 Adjusted EPS of $1.94) and among the highest P/FCF (26X ’09) among Mid & Large Cap Net stocks. But given our outlook for accelerating operating income (30%) and normalized FCF (40%+) growth in ’10 – without assuming major margin expansion – we believe relatively high multiples can sustain.

Comments

[optionboy:]

Wrong PE if 52 and earnings are estimated at 1.48, net income is supposed to increase zero this year. This stock is way overvalued.

Apr 20 06:09 PM

[stop_pumpers:]

How about this for a reason to upgrade?

Momentum-oriented speculators bought too many shares of amzn and want to get out before the stock collapses to zero.

Mark is just doing his job and trying to get them a way out.

Of course, this is a case where first to sell wins.

Apr 20 06:34 PM

[jeandit75:]

Sorry to disappoint you friends but AMZN is currently in a clear downtrend when looking at its trading pattern since the end of 2007. AMZN, as for any other company selling books and widgets through the Internet, is not immune to the recession. Just ask the poor people in Michigan, as an example, those who lost their jobs at GM and have worthless homes, if they intend to increase their spending through AMZN. I think I know the answer. The stock is going back to $40 before the year ends and much lower in 2010.

Apr 21 11:17 AM

[optionboy:]

You know the top is near when everybody thinks it can't go down. By any metric the valuation on this retailer is a joke. Mahaney wants to create volume for the big boys to exit. Problem is they can't find any more fools to buy a retailer selling a PE of 53 and a PEG of 2.5 that will have no growth in 2009 in a severe recession.

Apr 21 05:26 PM

[David Tsao:]

You have to be careful following Mark Mahaney. He had a price target of $119/share back in Jan/2008 and was throwing out unfounded Kindle sales projections drawing analogies to iTunes business model recently.

A quote from Mark back in Jan/2008
"Margin Expansion alone could drive double-digit EPS Growth"

3-months later in Apr.2008 his research comments for AMZN,
"The margin outlook is disappointing"

Amazon continues to operate with low margins. They've had impressive top line growth in this environment, but until margins expand to justify the valuation, I'm staying away. You'd be wise not to digest too much of Mark Mahaney's analysis.

Apr 22 10:09 AM