Amazon Digging Deep Moats, And It’s About To Have Big Sales Growth

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[credit provider=”Associated Press”]

Amazon is about the enter a new phase of incredible revenue growth, says Citi analyst Mark Mahaney, who is upping his price target on the stock to $240 from $190.Amazon’s earnings were a miss last quarter, but it beat on sales by a quite a bit.

Amazon’s earnings took a hit because it was investing in projects that are going to lay the foundation for its future growth.

Mahaney says Amazon is spending money to dig “deeper moats.”

Mahaney says Amazon’s weak gross margins are “discretionary,” not “structural.” Meaning, in the long run the margin corrects itself.

Here are hte bullets from Mahaney:

  • Raising PT to $240 — Our new PT is based on our P/FCF analysis and supported by our adjusted P/E analysis. We now apply a 23X multiple (or roughly 4.4% FCF yield) to our normalized (fully taxed) 2012 FCF estimate of approximately $4.96B ($10.54 per share). For context, since the beginning of 2007, AMZN’s forward P/FCF multiple has ranged from approximately 10X to 31X, with an average of 20X. And AMZN’s current FCF multiple is 25X 2011E. As support, our $240 target price would imply an approximate 40x multiple to our 2012E adjusted EPS (excluding stock comp) of $6.10.
  • Reiterating Key Q1 Highlights — 1) 51% Y/Y Unit growth was the highest in 5+ years; 2) AMZN generating approx 38% Y/Y organic revenue growth on a 40% comp – that’s rare-air growth; 3) AMZN’s most “mature” market (U.S.) is generating 45% Y/Y growth on a 47% comp – that’s very rare-air growth; & 4) It’s AMZN’s “discretionary” Operating Margin – not its “structural” Gross Margin – that has been under pressure, and the heavy R&D, Fulfillment & Marketing spend is likely creating deeper moats.
  • Why does AMZN get an “Investment Cycle Pass”? – 1) Because AMZN’s investments are clearly from a market-share-gaining position of strength. (As a miniproof of how far back the EPS slingshot is getting wound, AMZN’s Revenues are projected to increase 200% from 2009 to 2011 while EPS would grow a mere 25%); 2) Because AMZN faces material new growth opportunities including Consumer Staples, Cloud Computing, Digital Media, and Apparel & Footwear, and & 3) Because AMZN materially benefits from most of today’s major Net platform trends (Mobile, Cloud, Digital Goods) and is largely unaffected by the rise of Social Networking.
  • Reiterate Buy – We view our Long Thesis well intact: 1. AMZN faces a Double-Double Opportunity (Online’s share of total Retail Sales will likely double over the next 5-10 years and AMZN’s share of Online Retail Sales will also likely double); 2. AMZN has significant new revenue growth runways (Web Services, Consumer Staples, Digital Media Offerings…); 3. AMZN has one of the best management teams in the ‘Net sector.