UBS Upgrades Amazon.com (AMZN) to Buy, Citing Prime and Fulfillment Effect

(Updated - July 14, 2015 8:52 AM EDT)

UBS upgraded Amazon.com (NASDAQ: AMZN) from Neutral to Buy with a price target of $550.00 (from $450.00), saying the central theme of the change "residing within the flywheel that Amazon is creating via Prime subscriber growth (i.e., +53% YoY in 2014) & the Fulfillment by Amazon (FBA) business."

"The fast growing and higher spending Prime subscriber base has increased the importance of selling Prime eligible items, leading to greater penetration of the FBA offering within Amazon's base of 3P sellers," analyst Eric Sheridan said. "Further, we believe the resultant increase in Prime eligible product selection will lead to greater site conversion, increased annual spend per customer, and ultimately, higher levels of gross merchandise value for Amazon."

In addition to Prime + FBA Flywheel effect, the firm sees upside from:

1) Potential fulfillment leverage, with recent industry conversations suggesting that Amazon is slowing the pace of fulfillment center (FC) expansion due to its geographic expansion (especially in the US) nearing completion, with additional leverage potential stemming from a further rollout of Amazon Robotics (Kiva Systems), which we estimate could save ~$900mm+ in annual personnel costs;

2) Growth runway within AWS, which we expect to maintain the dominant position in the Infrastructure-as-a-Service (IaaS) market while expanding into other IT spending pools; and

3) Optionality for Amazon around its position in China, which we suggest could be translated into a 3-9% JD.com equity stake (one of many loss stemming actions Amazon could take within China).

New FY 2015 ests are revenues of $105.2b (from $102.7b), gross margins 32.6% (from 32.4%), & CSOI $3.3b (from $2.6b). New FY 2016 ests are revenues of $126.0b (from $121.0b), gross margins 34.9% (from 33.3%), & CSOI $5.6b (from $4.1b).

For an analyst ratings summary and ratings history on Amazon.com click here. For more ratings news on Amazon.com click here.

Shares of Amazon.com closed at $455.57 yesterday.

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