UPDATE: Morgan Stanley Upgrades Amazon.com (AMZN) to Overweight; The Rise of the World

January 7, 2013 6:52 AM EST
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(Updated - January 7, 2013 10:13 AM EST)

Amazon.com (NASDAQ: AMZN) is bucking the broader market weakness Monday, rising 3.5 percent early on a notable upgrade at Morgan Stanley.

Morgan Stanley's Scott Devitt upgraded Amazon from Equalweight to Overweight with a $325 price target saying he has high conviction in the international opportunity.

Morgan Stanley Global eCommerce team projects $1T in global eCommerce sales by 2016 compared to $512B in 2012. The estimate Amazon's global GMV market share will increase from 14% in 2012 to 23.5% in 2016.

Devitt said Amazon.com’s fulfillment network is an underappreciated, strategic asset. "Future success in both offline and online retail will be heavily dependent upon last-mile fulfillment capabilities," he comments. "Companies, such as Amazon.com, that have the ability to decrease variable unit-costs in exchange for fixed-costs will have the opportunity to expand margins and take share."

Commenting on China, the analyst said while the market is large enormous investments must be made. He notes Amazon.com is ranked fourth in China in terms of GMV. "A price-conscious market and the need to build a fulfillment network mean that the company will continue to be in a drawn-out battle that will result in low international margins."

The firm makes a Bull case of $400 per share, if: Amazon.com continues to win globally and successfully segues from 'asset-light' to full eCommerce sell-through in emerging markets. Long-term Adj. EBITDA margin tops out at 9.0% and Adj. EBITDA to UFCF conversion settles at 50%.

The bear case is $200 per share, if: Amazon.com cedes share of digital video spend; Apple takes share in eBooks and traditional retailers fight to the death, triggering a price war. Slower inventory turns and lower margins hurt long-term ROIC. Long-term Adj. EBITDA margin tops out at 7.7% and Adj. EBITDA to UFCF conversion settles at 42%.

The base case is $325.

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

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