Credit Suisse (CS) previews Amazon.com Inc. (NASDAQ:AMZN) 4Q16 results – Credit Suisse modestly decreases its price target objective for Amazon shares to $950 versus prior $1000 as CS makes significant changes to its underlying assumptions including layering in explicit estimates for standalone Prime Video subscribers and FY17 adj. EPS estimate is now $11.51.
Credit Suisse has noted previously, that the strategic and product driven rationale behind Amazon's decision to invest into content, fulfillment centers, and data centers should now be well-familiar to investors. CS was puzzled to see Amazon lead with Prime Video as a standalone subscription product first prior to launching e-commerce operations but CS believes this will be the new beachhead product for what should be global e-commerce expansion.
From a more near-term tactical perspective, Credit Suisse believes that Amazon will report trough CSOI margin for 1Q17 – the company has established a pattern of investing (in either fulfillment centers or data centers) and growing into the larger infrastructure. Otherwise, CS maintains its Outperform rating and updated investment thesis for Amazon shares is predicated on the following longer-term factors: 1) re-establishment of ecommerce segment operating margin expansion as Amazon grows into its larger infrastructure, 2) ongoing margin benefit due to shipping loss moderation, and 3) Capital intensity to run AWS is leveling off as CS anticipates usage rates have dropped below 100% - this will augur flattening nominal capex dollars (including that acquired through capital lease) and free cash flow expansion.
Credit Suisse maintains its Outperform rating and DCF-based target price which is based on a 10.5% WACC and 3% terminal growth is now $950 vs prior $1000.