Monday, February 1, 2010 Inc. (AMZN)

A Good Holiday Season;4Q09 Review

Action/Event: Amazon reported better than expected 4Q09 earnings.
Overall, net sales totaled $9.5 billion, up 42% year over year on a reported
basis and up 37% excluding F/X.
Consolidated segment operating income
was $597M, up 66% y/y and above our $482m forecast with margin of 6.3%
100 bps ahead of our est. Combined with a lower than expected tax rate,
EPS was $0.85 vs. $0.52 last year and our $0.75 estimate.

■Investment Case: We note reported revenue included the Zappos deal
which closed in November and was not included in AMZN’s guidance or our
estimates. Excluding ~$200m from Zappos, revenue growth would have
been 39% (34% x-F/X), still above our $9.1 billion estimate.
The strong performance supports our view that Amazon will benefit from
ongoing e-commerce growth as well as market share gains. We continue to
believe Amazon is well-positioned to leverage its scale over the long run with
attractive marginal return characteristics.

■Catalysts: For 2010, we are raising our EPS estimate (excluding stock
compensation) from $2.53 to $2.84 vs. $1.37. This reflects the better than
expected 4Q09 results, the inclusion of the Zappos deal, as well as a
change in accounting for Kindle hardware, which should pull forward
revenue from 2011 to 2010.

■Valuation: To reflect our estimate changes, we are increasing our target
price from $125 to $130, based on our DCF analysis. This implies that
AMZN can trade at a 34x P/E and a 17.9x P/FCF multiple based on our
2010 forecasts. While we consider Amazon a core long term holding, we
maintain our Neutral rating given full valuation.


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