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Amazon Gets a New Vote of Confidence

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Amazon (NASDAQ:AMZN) has gotten its newest vote of confidence from analysts after the retail giant and maker of Kindle tablet devices missed third-quarter earnings in October.

On Monday, Evercore Partners analyst Ken Sena added Amazon to the boutique investment bank's "Conviction Buy List" on expectations that margins are headed higher. In particular, Sena highlights the company's higher margin Amazon Web Service as being able to take online retail market share and grow in importance to overall earnings in coming years.

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While recent earnings show Amazon's profit margins remain at razor-thin levels and its profitability has evaporated, the analyst upgrade signals it doesn't take much for the company to change Wall Street expectations.

In fact, optimism on Amazon hinges on a tweak to assumed long-term growth rates of some of the company's businesses and not upcoming quarterly earnings -- giving chief executive Jeff Bezos yet more time to prove skeptics wrong.

"Given Amazon Web Service's relatively lower contribution to Amazon results, even on meaningfully higher growth assumptions, our total revenue and margin assumptions increase modestly," writes Sena, in a Monday note to clients that raises Amazon's price target to $270 from $250.

In October, Amazon's earnings miss and third-quarter net loss raised investor questions as to whether the Seattle-based company can maintain its premium-priced valuation and grow overall profit margins as it tries to lure consumers unto its Amazon Prime and Kindle subscriptions by way of subsidized subscriptions and discounted Tablet and e-reader devices.

After assessing the company's earnings, some on Wall Street like Sena are casting new votes of confidence on Amazon's strategy, and the growth projects undertaken by CEO Bezos. Meanwhile, Amazon's third-quarter earnings have done little to move shares, even as valuation multiples for the company move higher.

Sena of Evercore now sees Amazon Web Service revenue growing at a 45% compound annual clip through 2018, rising from present full-year forecast revenue of $2.1 billion to $19.7 billion in six years' time. That's an upgrade from a previous forecast of a 36% growth rate, and it's enough to boost the company's overall growth expectations by 40 basis points to 26.5%.

The key, according to Sena, is that as AWS becomes a more important component of Amazon's overall earnings, it will drive create a dynamic of rising profit margins in excess of revue growth -- a part of overall earnings that remains a big question mark for the company.

In late October, Amazon reported a net loss of $274 million, or $0.60 per share, for the third quarter with sales totaling $13.81 billion. In the same period a year earlier, Amazon earned $63 million, or $0.14 per share, on sales of $10.88 billion. The results reflect a loss of $169 million, or $0.37 per share, related to asset impairment at its LivingSocial unit.

The average estimate of analysts polled by Thomson Reuters was for a loss of $0.08 per share in the September-ended period on revenue of $13.92 billion.

"Our approach is to work hard to charge less. Sell devices near breakeven and you can pack a lot of sophisticated hardware into a very low price point," said Jeff Bezos, Amazon's founder and CEO, in a statement released with earnings that highlighted sales of the Kindle Fire Tablet, Paperwhite e-book readers, and overall digital book sales. The company said its Kindle Fire HD 8.9 tablet priced at the $299 ships on November 20.

Bezos' approach to growing products at the expense of earnings was evident in Amazon's operating margins, which came in at a negative 0.2%, declining for a third straight quarter.

For the fourth quarter, Amazon forecast between an operating loss of $490 million and an operating profit of $310 million with sales projected between $20.25 billion and $22.75 billion. Also in October, Apple (NASDAQ:AAPL) posted fourth-quarter results that raised questions as to the direction of the tech giant's momentum headed into 2013.

The iPhone and iPad maker reported revenue of $36 billion, up from $28.3 billion in the prior year's quarter, and above analysts' forecasts of $35.8 billion.

Apple earned $8.67 per share on net income of $8.2 billion, up from earnings of $7.05 per share and net income of $6.6 billion in the same period last year. Analysts surveyed by Thomson Reuters, however, were looking for earnings of $8.75 per share.

The Cupertino, Calif.-based firm sold 26.9 million iPhones during the quarter, a 58% year-over-year hike. Apple's iPhone number also disproved rumors that the company has been struggling with supply chain issues. Wall Street had forecast between 25 million and 26 million iPhone sales.

Social networking giant Facebook (NASDAQ:FB) beat on both the top and bottom lines when it reported its third-quarter earnings in late October.

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