Presenting: the case from the most bullish Amazon analyst on Wall Street.
In a note Tuesday, Bernstein’s Carlos Kirjner and team raised their 12-month target price on the stock from $770 to $1,000, or 47% higher than where it closed on Monday.
The new price target is now the most bullish on Wall Street, topping JP Morgan’s target of $915 according to Bloomberg.
In pre-market trading Tuesday, the shares rose as much as 2% to $695.
Kirjner wrote that the company is essentially in the perfect position to ramp its gross margins much faster than consensus forecasts.
Here’s Kirjner (emphasis ours):
We think Amazon’s businesses are now so large, fast-growing, and profitable that it is harder and harder for the company to find new areas of investment to keep up with the growth in gross profits. It will be even harder in a year, as AWS adds $5-$6 billion in revenues with well over 50% variable (operating income) margin yet again, content expenses growth slows as it probably will have approached or exceeded $3 billion, and 8th generation fulfillment centres become a more significant portion of the installed base. All of this as Prime continues to grow users worldwide and support GMV and revenue growth. In other words, time is on the side of margin expansion.
Kirjner is this bullish about Amazon’s gross margins in part because of the strength of Amazon Web Services. The company’s cloud-computing unit drove growth in the first quarter and recorded a 64% year-on-year jump in revenues.
Amazon’s accounting shows that web services do not have any cost of goods sold (COGS), which points to higher margins for the company, Kirjner says.
Additionally, Kirjner thinks that higher margin categories like apparel on Amazon’s more popular service — its online marketplace — will grow faster than items with lower margins. This should be supported by the growth of Prime, Amazon’s subscription service that offers free two-day shipping on virtually anything.
Kirjner estimates that the cost of goods sold among first-party vendors on Amazon is trending downwards, which should be supplementary to the company’s gross margins.
On Amazon Prime Video, the analysts wrote, “As Amazon’s content library grows, its growth will decelerate significantly. We believe that along 2017 we will see streaming-content-related COGS decelerate and ultimately grow slower than retail gross profit, further contributing to gross margin expansion.”
“We suspect this effect, which will become increasingly important towards the end of 2016 and into 2017, is not fully reflected in consensus gross margin estimates.”
Disclosure: Jeff Bezos is an investor in Business Insider through hispersonal investment company Bezos Expeditions.
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