Firm notes that at a high level, they have long considered Amazon a core Internet franchise because it screens very well against their four long-term factors: 1) Management strength – AMZN has consistently and successfully obsessed with innovation & customer experience; 2) Competitive moats – it’s increasingly hard to imagine someone taking share from Amazon in its core businesses, although they do focus on the potential negative impact of developments like the launch of Apple’s “tablet” on Amazon’s Kindle offering; 3) Significant long-term growth opportunity – Citi's Double-Double thesis – over the next ten years, Online share of Retail Sales (currently 7%) could double while Amazon’s share of Online Retail Sales (currently 10%) could also double; and 4) Inherently attractive business model – margin expansion (AMZN – check) and significant conversion of EPS into FCF (AMZN – check).
Four Key Near-Term Updates – 1) eCommerce Channel Checks suggest accelerating Online Retail and AMZN market share gains – 73% Y/Y holiday SSS growth on AMZN’s platform, per ChannelAdvisor; 2) comScore Traffic Analysis shows accelerating AMZN Website trends – 19% Y/Y visitor growth in Oct. & Nov. vs. 18% Y/Y in Q2 and 9% Y/Y in Q2; 3) Quarterly eShopping Cart analysis continues to highlight AMZN Selection Superiority and Competitive Pricing Position; and 4) NPD Video Game Console & Software QTD Sales Trends indicate Less Worse – though clearly still weak (down 24% Y/Y/down 8% Y/Y) – trends.
Raising Estimates Above Consensus — Raising Q4 GAAP EPS by $0.08 (13%) to $0.72 & ‘10 GAAP EPS by $0.40 (16%) to $2.92:
One Long-Term Update: Greater Than Expected Kindle Traction – Based on a series of datapoints & analyses, the firm has increased their Kindle estimates again. Specifically, they believe Amazon will sell approx 2MM Kindles in ‘09 (up from Citi's prior est. of 1.5MM) and Amazon may well generate $1.6B in total Kindle device and book sales by 2010, approximately 5% of its total revenue. The Kindle has definitively established itself as the “iPod of the Book World.”
Addressing Valuation Concerns – AMZN’s valuation remains intrinsically very high, BUT: a) AMZN’s average forward Non-GAAP P/E since ‘07 has been 36X, and AMZN’s current Fundamental & Market Share inflection point arguably supports an above historical average multiple; (Interestingly, while AMZN’s stock is up almost 70% since mid- April, its forward multiple has actually gone down…AMZN has actually gotten less expensive…because EPS estimates have increased so materially.) b) Citi's 3-year EPS CAGR of approx. 30% arguably supports a premium valuation; c) AMZN has consistently maintained one of the Internet & Retail Sectors’ highest conversion of EPS into FCF (195% from ’07-’09), which again argues for a premium valuation based on EPS Quality.
Notablecalls: So, we have a new Street high price target for Amazon. With the stock down almost 20 pts from its yearly high and looking very vulnerable on chart basis I suspect the shorts are in for another merry-go-round.
Also, take a look at the estimate bumps - it seems Citi has raised 2010/11 estimates way ahead of consensus.
This is bound to draw attention.
The futures are in deep red this morning, which makes buying AMZN a bit tricky but as I have noted several times before the stock seems to be a sleeper in the pre-market only to take off after the open. We may see similar action today as well.
I think the shorts have gotten a bit too comfy in the name (again!) and will be punished for it.
If they get AMZN going today the stock can hit $131+ level easy, I suspect.