Bank of America analyst Justin Post believes US consumers will soon start spending again and he upgraded Amazon (AMZN) shares today to Buy from Neutral as a result.
Post believes there is as much as 24% upside to the current share price over the next year. Here is how he gets there:
- E-Commerce should return to double-digit growth in 2010. Post believes e-commerce will continue to grow its share of applicable retail sales (7.6% in ’09 growing to 9.5% in ’12). As a result, the sector should return to double-digit growth after a tough 2009 — 14% in 2010 and 11% in 2011, according to his estimates.
- E-Commerce growth is underestimated more at Amazon than at other retailers. Despite strong expectations for the industry, Post points out that most analysts expect about $27 million (18% growth) in 2010 revenue from Amazon versus his estimate of $28.5 million (24% growth).
- Recent competitive concerns create a buying opportunity. The AMZN shares are down about 11% since July 23 on concerns that Walmart and Alibaba could put pressure on the company as they compete for US e-commerce dollars. In addition, concerns that the company may have to lower prices on the Kindle have also raised concerns. However, Post believes Amazon’s position remains strong, citing customer loyalty, distribution infrastructure and technology investment.
Given the recent weakness in the shares and the potential for a surprising strong Q4 in retail sales it makes sense to us as a trading call. We’re still keeping our eyes on growth and margins though over the long-term as media sales and increased competition remain risks.