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Alex Cho

Amazon Price Target Cut to $930 from UBS

The consensus is shifting back towards the Amazon revenue narrative, which may take a while to materialize. That being the case, I’m thinking now would be the right time to buy, as the analyst commentary seems to have reset on lowered expectations in the near-term, but long-term revenue acceleration on efforts to invest into various growth areas seems supportive of the multi-year discount assumptions that are likely to be embedded later this year.

The points are neatly summarized by Eric J. Sheridan over at UBS AG:

With mgmt squarely focused on investing for the long term in logistics, media consumption, India & cloud computing, we see volatility in operating income trends as an output of duration mismatches between investments vs. revenue as opposed to the beginning of a multiyear "investment cycle" that would suppress the forward margin curve materially lower (after this recent three quarter reset). In our view, this wall of worry can be climbed through sustained topline performance (as opposed to deceleration) and/or a return to an upward revision cycle to forward operating income estimates.

Eric Sheridan reset his estimates on revenue/earnings as he anticipated revenues of $34.9 billion (prior $35.6 billion) and gross margin of 36.5% (from 36.1%). His new EPS estimate is lowered from $1.44 to $1.20, which is perhaps at the mid-to-low-end of the consensus range. Nonetheless his target price is still higher than many of the other analysts I actively follow at $930, versus his prior price target of $950.

His financial model is conservative, his price target estimate is slightly at the high-end, but I think that corresponds mostly to AMZN’s inflated premium for growth relative to other internet peers. I think there’s a good argument for simply buying on the dip.

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