A river runs through it: Amazon’s profit surge sweeps away doubts

Amazon boxes are seen stacked for delivery in the Manhattan borough of New York City, January 29, 2016.

Reuters/Mike Segar

The source of Amazon.com’s namesake river may be uncertain, but there’s no doubt about where the online retailer’s surging revenue is flowing from – just about everywhere.

Amazon.com Inc’s (AMZN.O) shares rose as much as 11.3 percent to $669.98 in early trading on Friday, a day after the company reported profit and revenue that swept away analysts’ estimates.

“It’s all just working,” JP Morgan analysts wrote in a research note.

“While it’s tempting to try to pull out each component of AMZN’s strong 1Q (and generally recent) performance, we think it’s the combination of many factors – the ‘AMZN Flywheel’, Prime, a growing distribution footprint, getting closer to customers, 3P (third party), AWS … the list goes on.”

The “Amazon Flywheel” refers to founder Jeff Bezos’ strategy of offering the biggest selection of goods at the lowest prices and providing the best customer experience to create a “positive feedback loop”.

Amazon is also known for making bold investments in new business areas even at the expense of profits – a strategy that is often criticized by investors.

There was little criticism this time, though.

“We believe these results are further evidence that Amazon’s investment in infrastructure, logistics, and Web services is accelerating market share gains, cash flow growth and continued high returns on invested capital,” Goldman Sachs analysts wrote in a client note.

Goldman, which has a “buy” rating on Amazon, raised its price target to $800 from $720.

Revenue in Amazon’s three main businesses – online retailing in North America, international online retailing, and cloud business Amazon Web Services (AWS) – swelled 27 percent, 26 percent and 64 percent respectively.

AWS, launched 10 years ago, delivered more profit in the first quarter than Amazon’s retail business.

While AWS is Amazon’s fastest-growing business, Amazon Prime and Marketplace, where the company acts as a middleman for third-party vendors, are also gaining momentum.

“On the retail side, Prime is the driver,” wrote Macquarie Research analyst Ben Schachter, who raised his target to $760 from $725 while maintaining an “outperform” rating.

PRIME TIME

Amazon’s Prime loyalty program offers one-hour delivery, original TV programming and access to digital entertainment products such as Prime Music and Prime Video for an annual $99.

“In both North America and International, Prime continues to thrive and we believe continued investment in original content, expansion in existing markets and the still-large opportunity to add new markets offers lots of runway,” BMO Capital Markets analysts Daniel Salmon and William Lowden wrote.

BMO, which maintained its “outperform” rating on the stock, raised its price target to $800 from $700.

At least 20 brokerages raised their price targets, to a median of $777.50. JP Morgan was the most bullish with a target of $915, an increase from $822.

At that price, Amazon would be valued at $432 billion, making it the third-largest U.S.-listed company by market value, behind Apple Inc (AAPL.O) and Google parent Alphabet Inc (GOOGL.O), both of which posted disappointing quarterly results.

At current prices, Amazon is valued at about $317 billion, up about $35 billion from Thursday’s close.

Amazon shares, which have gained 40 percent in the past year, trade at 98.7 times forward earnings, indicating that investors see huge potential for more growth. Apple trades at 10.8 times earnings, while Alphabet trades at 19.9 times.

However, to justify Amazon’s current share price, Amazon’s earnings per share will have to grow at a compound annual growth rate of 90 percent over the next five years, according to StarMine. Such abnormally high growth rates have proven to be difficult to sustain over long periods.

Of the 44 analysts covering the stock, 39 rate it “buy” or higher and five “hold”, according to Thomson Reuters data.

(Reporting by Supantha Mukherjee in Bengaluru; Additional reporting by Saumyadeb Chakrabarty; Editing by Ted Kerr)