Amazon (AMZN) PT Lifted to $520 at Morgan Stanley; Just Getting Started

(Updated - May 21, 2015 10:14 AM EDT)

Morgan Stanley analyst Brian Nowak reiterated an Overweight rating and boosted his price target on Amazon.com (NASDAQ: AMZN) to $520.00 (from $450.00). Nowak said "current trends, improved disclosure, and our sensitivity analyses on gross profit/customer, fulfillment costs, int'l retail and AWS profitability give us 4 ways for AMZN to continue to deliver top and bottom-line beats."

1. '16 Street Gross Profit (GP) is 5% Too Low as it Implies GP/Customer Growth Decelerates 1,275bp to 0%. AMZN’s retail GP/cust. rose by 15% in 1Q:15, the fastest growth since 4Q:09 when AMZN had 63% fewer customers and GP/cust was 22% smaller than today. Amazon Prime and efforts to improve selection, pricing and conversion are accelerating wallet share gains, and AMZN is expanding margins too. We model 7% GP/cust growth in '16 (which may be conservative given trends) and are 5% above Street GP. Our sensitivity work shows Street numbers imply GP/cust goes ex growth (0%) in '16, which has never happened.

2. Fulfillment Efficiencies are Driving Higher Profitability and Street '16 CSOI Numbers are 5% Too Low Even if AMZN Returns to Investment Mode. AMZN's CSOI is benefiting from fulfillment efficiency gains as fulfillment costs/unit are falling for the first time since 2010. We see this continuing in '15 but for now are modeling a return to investment in '16, assuming fulfillment costs/unit rise by 6%. We're still 5% above Street '16 CSOI, which (all else held equal) implies '16 fulfillment costs rise by the most since '11 when AMZN added a record 17 FCs.

3. Int'l Retail Losses Aren't as Bad as Believed and the Street Already Implies They Reach Record Losses. AMZN's segment disclosure taught us int'l retail losses are less severe than believed as int'l retail only lost -$144mn in '14 (vs. the total reported -$298mn) and 1Q:15 was break-even ex FX. We see FX headwinds and India leading to -$269mn of losses in '15, but we model losses to moderate in '16 given AMZN's recent incremental discipline. All else held equal, AMZN's '16 int'l losses would have to reach a record -$372mn in order to get down to Street CSOI numbers.

4. AWS is More Profitable than Previously Believed, has Easy Comps, and Street Numbers Imply Margins Fall by 190bp More Than Modeled. AWS’s 17% CSOI margins were the surprise of 1Q. We see margins staying at 17% in '15 (even as AWS laps its aggressive price cuts) and falling to 16% in '16 (conservatively assuming AWS price cuts and reinvestment). But all else equal, Street numbers imply AWS margins fall another 190bp in '16. While we never rule out more future price cuts, this feels like a material margin of safety.

The firm's bull case price target is $600, while its bear case price target is $320.

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 $423.86 yesterday.

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