Amazon.com Inc (AMZN)

[rolvram]

$800 target:

Piper Jaffray analyst, Gene Munster, thinks street estimates are too low for Amazon.com (NASDAQ: AMZN) and there could be upside in the coming year. In short, he believes Amazon can invest in the business while expanding margins which is not in consensus estimates. His thesis has 3 points:

Concerns over margin compression returning from AWS & fulfillment expansion are misunderstood. Munster believes that Amazon does not pendulate on profitability as perceived. While many believe 2015 margin expansion was due to Amazon cutting back expansion plans and R&D experiments, it is due to Amazon's $10B of gross profit growth, its first year of fulfillment leverage, and massive Prime adoption.

Street estimates are mis-modeling margin expansion in 2016. Munster is modeling 240bps of operating margin expansion in 2016, largely from leveraging fixed assets. The company will expand margins through lower retargeting expense for new Prime members, AWS's growing share of revenue, expansion of robotics, mix shift towards 3P sales, leveraging India infrastructure, and higher margin revenue sources.

Unit growth should exceed expectations. The Amazon Search Index indicates that unit growth during the quarter was likely in the 24%-26% range, consistent with his analysis of Amazon's full year operating disclosures. His index has a .95 correlation with reported unit growth over the past 31 quarters. Despite strong unit growth YTD, he believes investors are expecting 22%-24% unit growth.

No change to Overweight rating or $800 PT.

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 $596.38 yesterday.