Amazon: the comeback king

Wall Street’s love affair with Amazon has been rekindled following shares climbing by nearly 10% on Friday after Amazon reported a better-than-expected profit.

Amazon shares have been on a tear since early February, surging about 45%. Amazon is now back in breakeven territory for the year and less than 2% below the all-time high it hit in December.

Warren Buffett is a big fan of the company too apparently – even though his Berkshire Hathaway does not own the stock.

Buffett went out of his way several times to praise Amazon and CEO Jeff Bezos during Berkshire’s annual shareholder meeting on Saturday. He did so again on CNBC Monday morning.

Amazon’s triple-digit P/E ratio probably scares off Buffett – who is a consummate value investor.

But it’s telling that he is willing to admit how successful Amazon is – especially since it would appear that much of that success is coming at the expense of Walmart, which is one of Berkshire’s biggest investments.

Amazon passed Walmart in market value for the first time ever last July. It is now worth about $320-billion – nearly $110-billion more than Walmart.

Analysts think Amazon has a lot more room to run too. The consensus price target is just shy of $800 a share. That’s almost 20% higher than current levels.

R.J. Hottovy, an analyst with Morningstar, says that Amazon’s international units are starting to pick up steam. He expects that Amazon will add a lot more Prime members in Europe and Japan in the coming quarters.

He added that Amazon seems a little more focused now and is less prone to invest in non-core businesses that may not really help boost Amazon’s revenues and Prime member base. Remember the Fire Phone flop?

“The biggest investment risk with Amazon is Jeff Bezos’ brain. It all depends on how aggressive Amazon wants to be,” Hottovy says. “As long as Amazon’s investments build the user base, then I still think there is some upside to the stock.”

Clothing is one of those investments that should boost revenue and profits.

The company recently has started to sell its own private label clothing brands. John Blackledge, an analyst with Cowen, wrote in a recent report that he expects Amazon to become the biggest apparel retailer in the U.S. as early as next year.

Yes, Amazon often gets criticised for heavy investments in free shipping and new businesses.

But Michael Pachter, an analyst with Wedbush Securities, says those initiatives appear to be paying off. Gross margins surged in Amazon’s most recent quarter.

The stock is extremely expensive. It trades at nearly 130 times 2016 earnings estimates of $5.33 a share. But Pachter says that investors buying Amazon today are taking a much longer-term view.

“You’re not paying this much for Amazon because you like the quarter. You’re paying this much because you think earnings are going to go up a lot,” he says.

“The only reason for it to trade at this valuation is because people think Amazon will make $20 to $30 a share a year someday,” Pachter adds.

Buffett might even believe that. But don’t hold your breath waiting for him to buy the stock anytime soon. It’s still way too rich for his blood.

By Paul R. La Monica for

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