Amazon: Operating Leverage May Drive Gains

Scott Devitt, the Internet analyst at Stifel Nicolaus, this morning boosted his rating on Amazon.com (AMZN) to Buy from Hold, setting a price target on the stock of $44. “We believe Amazon is entering an operating leverage cycle and that the company’s shares perform quite well such environments,” Devitt wrote in a note this morning. “We believe the downside risk to the shares to be the lower $30 and the potential upside into the mid-$50s, or the midpoint of the last two leverage cycles. We would be buyers of the shares here and aggressive buyers of the shares if the stock were weak following [fourth quarter] results.

Devitt lists a number of potential 2007 and 2008 catalysts for Amazon shares:

• Slower technology and content spending.
• Slower headcount additions.
• More selection.
• More retail categories.
• More services.
• More international expansion.
• More fixed cost scale driven by improving revenue growth trends.
• Lower logistics costs due to lower energy prices.
• Less sales and marketing spend as a percentage of GMV (gross merchandise value.).

“At its core, Amazon is a technology company that happens to focus on the retail vertical,” he writes. “Amazon offers a more capital efficient, centralized alternative to the traditional retail method of ‘growth by the addition of store footage.’ In fact, both Amazon and eBay (EBAY) trade for material discounts to Target (TGT) and Wal-Mart (WMT) in a free cash flow basis…We are unaware of any other $13 billion retail business growing organically (think same store sales) at 26% with an ROIC [return on invested capital] north of 20%, capex/CFO [cash flow from operations] of 25%, and a forward FCF [free cash flow] yield of 4%…In our view, this business is misunderstood, is unique, is well-positioned, is solely focused on its customers (consumers, sellers and developers) and is undervalued.”

Amazon today is up 73 cents, at $37.75.

Comments

[bankarb:]

From a technical perspective AMZN is breaking down and must be sold.
I am looking for a target of 32.

Expect a weak 4th quarter given slow sales by other retailers.
The hot part of X-mas was electronics, which is not what AMZN is good at.

Disclosure: At the time of this post I am short AMZN though positions may change at any time.

2007 Jan 22 07:14 PM

[Joe Thomas:]

That Amazon is a misunderstood business is evident from the article above. It starts by stating they are a technology company at its core with none of the disadvantages of traditional Retail; but in the next few lines calls it a $13 bio retail business which is undervalued when benchmarked with its peers in the retail vertical. If its a technology company, should it not then be valued based on technology company metrics. Likewise should Wal*Mart be seen as a Supply Chain company at it's core which happens to be in the Retail Vertical?

2007 Jan 29 05:25 AM