|Oh Henry! Oh Amazon!|
By MARK VEVERKA
Amazon.com stock surges, as gross margins jump.
Where is Henry Blodget when you need him? Somebody needs to explain how Amazon.com's share valuation really works. Because, despite wondering about it for more than a decade, I still can't figure it out. First it was eyeballs. Then it was clicks. Then revenue-per-customer, then wallet-share and now gross margins. Price-earnings-ratios be damned.
We need Blodget, the former brokerage analyst, to explain it. After all, he made the audacious call back during the dot.com bubble predicting that the Seattle e-tailer's shares would hit 400. But unfortunately for him, he ran afoul of then-New York State Attorney General Eliot Spitzer, who got him banished from the securities industry and sentenced to life as a journalist and blogger. (Blodget is now editor of Business Insider, which he founded.)
But Blodget long ago figured out something about this mysterious stock that defies nearly everything we think we know about investing. Amazon shares (ticker: AMZN) blasted off last week like one of CEO Jeff Bezos's rocket ships, soaring 15.75% Friday, ending the week at $226.85.
To be sure, Amazon also blasted through the Street's earnings estimates for the first quarter, reporting 28 cents a share, compared with the consensus estimate of six cents. The big beat came on the heels of a big whiff last quarter. So inconsistent. So Amazon.
ON TOP OF THE IMPRESSIVE EARNINGS, analysts were euphoric over the 1.2- percentage-point jump in gross margins, to 24%, after quarters of weak gross margins. It was the company's biggest margin gain in about 10 years. As we have stated before, the one thing we understand about Bezos is his resolute belief in heavy spending to sustain growth–even at costs that often squeeze margins and defy historical disciplines. His build-it-and-they-will come philosophy has served the company well, whether constructing warehouses, manufacturing e-readers, or building massive data centers for cloud computing.
Last week, the company credited the heftier margins to faster growth in its online marketplace and cloud-computing operation, Amazon Web Services, or AWS. As a result, a number of brokerages upgraded their recommendations. Goldman Sachs software analyst Heather Bellini raised the shares to a Buy from Neutral, and her 12-month price target to $300 from $182. Nomura Securities' software analyst, Brian Nowak, also has a Buy rating; he boosted his target price to $285 from $200. Bank of America Merrill Lynch software analyst Justin Post changed his rating to Buy and lifted his target to $270 from $235.
The valuations were certainly not based on P/E ratios. The shares are trading at about 90 times 2013 earnings estimates. Compare that to Apple (AAPL) at 11 times 2013 estimates, and Google (GOOG) at 12 times.
For all of the attention paid to media, Kindles and retailing, the most compelling part of the company's growth story could be its cloud business, which has been difficult to measure until recently. Nomura's Nowak values Amazon Web Services at $48 a share, nearly one-sixth of his price target for the parent company. He estimates 2016 (yes, 2016!) AWS revenue at $6.21 billion, times 4.7, which is the enterprise-value-to-sales ratio of Rackspace Hosting (RAX), a leading cloud-services outfit, based in San Antonio.
Talk about the power of the cloud.