Mizuho Securities Starts Amazon (AMZN) at Outperform

Mizuho Securities initiates coverage on Amazon.com (NASDAQ: AMZN) with a Outperform rating and a price target of $498.00, naming it their #2 top pick in the Large Cap Internet sector (behind Facebook).

Analyst Neil Doshi commented, "Amazon has been investing heavily for the past several years on a number of key areas, including: expanding categories and selection; increasing the number and size of fulfillment centers; pushing AWS investments; spending on a broad hardware strategy, and increasing Prime services. We believe that some of the heavier investments may abate this year, possibly leading to greater operating margin expansion."

Key Points:

1) Amazon is the leading eCommerce & mCommerce retailer, and poised to gain outsized share over time. Based on our analysis, Amazon now has 16% of the total U.S. eCommerce market and we believe that by 2018, 1/5th of every dollar spent online will go to Amazon. We estimate that U.S. mobile accounted for $18 billion in 2014, which equates to approximately 22% of North America retail revenue in 2014. We expect Amazon’s U.S. mobile revenue to grow to $52 billion in 2017, representing 60% of the total U.S. mCommerce market.

#2) Gross margins have been increasing as investments in FCs and higher margin businesses appear to be paying off. In 1Q15, gross margins reached a record high of 32.2%, and gross margins have expanded YoY consecutively for the last 12 quarters. Larger FCs and Sortation centers have pushed down shipping costs. Also, with the materiality from higher margin businesses like AWS, 3P, and sale of more digital media products, we believe that AMZN should be able to grow its gross margin profile over time.

#3) AWS is a massive business, and massively profitable for AMZN. AWS started in 2006, and now generates more revenue than Yahoo!. With recent financial detail, we've also learned that in 1Q15, AWS accounted for 38% of Amazon's total Non-GAAP operating income, which is astounding, given that our and the Street's perception was that AWS was modestly-to-no-at-all profitable

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 $440.84 yesterday.

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