Wednesday, September 16, 2009 (NASDAQ:AMZN: Upgraded to Buy at Merrill Lynch/BAM

Merrill Lynch/BAM is upgrading (NASDAQ:AMZN) to Buy from Neutral with a $103 price target (prev. $95)

According to the analyst, the upgrade is based on six factors:

1) Leader in a growth sector – Merrill believes eCommerce sales will rebound to double-digit y/y growth in 2010, resuming the secular shift Online that was interrupted by the recession. Amazon has built sustainable competitive advantages in eCommerce including customer loyalty, distribution infrastructure, as well as technology investments, and these advantages have shown through with a sales gap to ecommerce growth between 1,700 and 2,800bps over the past six quarters. The gap shrank a bit in 2Q due to Amazon’s added exposure to video game category, but the firm thinks the gap could re-expand if the category improves (we have the gap shrinking in our estimates). This seems too conservative. Improvement in y/y industry growth to 11% in 4Q is driven by easy y/y comps. as well as assumption that the industry could see a normal 4% sequential growth in 4Q, consistent with 2006 and 2007.

2) Upside potential vs. eCommerce group - Merrill believes the street isunderestimating the potential eCommerce sector growth acceleration benefit for Amazon’s (just 54bp acceleration in 2010 growth vs. 2009 growth in street estimates) relative to other eCommerce stocks.

3) Positive eCommerce channel checks - online retail checks indicate accelerating growth for the sector driven in part by higher traffic conversion rates.

4) Positive seasonality – Amazon’s stock outperformed from Sept. 15th through Nov 30th in 2005-2008 and they think this year’s 4Q seasonal acceleration will likely be aided by easy currency comps.

5) Valuation upside based on history, with valuation support expected at 18x FCF. Amazon’s stock has traded at between 0.8x–2.0x sales over the past 5 years, and when company was beating estimates in 2007 stock moved toward higher end. Merrill believes a similar scenario could play out over next 12-months.

6) Competitive risks overblown, at least for next 12-months - Amazon’s stock has underperformed the Internet peer group since April due, in part, to competitive fears. This concerns have been driven by weaker media sales in 2Q (video game exposure) and a corresponding closing of US sales growth gap vs. eBay, loss of Target as a 3rd party partner in 2011, launch of Wal-Mart’s 3rd party online marketplace, and eReader announcements from Barnes and Nobel and Sony. Merrill believes that none of these competitive developments will impact Amazon’s sales in 2009 or 2010 (Wal-Mart’s sales are a small fraction of Amazon’s, and eBook sales barely impact Amazon’s total sales this year), with the outside possibility that Amazon lowers Kindle HW price to increase sales at the expense of margins. While there could be competitive margin pressure in sector long-term,Amazon’s customer, distribution and technology advantage position the company well long-term.

Notablecalls: So this upgrade follows similar upgrades in EBAY and YHOO over the past couple of days. The s-t risk here is AMZN gets bid up too far in the pre market (with large vol) and ends up like EBAY yesterday. EBAY got whacked soon after the open as people scrambled to take profits on a large gap-up.

So, I hope people will be somewhat more cautious today.

AMZN is surely the strongest mo-mo play in the group, so I suspect you will have to pay at least $85 to be involved.

I suspect it can do $86+ as soon as today. The stock's an animal! A-n-i-m-a-l! It has lagged the group and now the gates are open...

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