Natalie Parkinson
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Amazon’s stock seen soaring to $1,000

Shares of Inc. jumped 3% on Tuesday after analysts at Bernstein said the stock is undervalued and could soar by nearly 50% to $1,000 within the next year.

The bank raised its 12-month price target on the e-commerce giant to $1,000 from $770, making it one of the most bullish brokerages on Amazon’s shares.

The average rating among a survey of roughly 20 analysts is the equivalent to buy, while the median price target is $807.67, according to FactSet.

Bernstein said a number of tailwinds, such as efficiencies at new fulfillment centers that will help to lower costs, and revenue growth at Amazon Web Services, have not yet been baked into consensus estimates, which has shortchanged Amazon’s stock price. 

Shares of Amazon traded up 3% to $698 on Tuesday, pushing them up more than 42% over the last three months and 61% over the past year. They have vastly outperformed the S&P 500, which is up 12% over the last three months but down 2% on the year. The stock was also buoyed Tuesday by Amazon’s launch of a video service that will compete with Alphabet Inc.’s YouTube.

Bernstein, which has an outperform rating on Amazon’s shares, lifted its fiscal 2016 and 2017 earnings per share estimates by several dollars on Tuesday, citing efforts by Amazon to reduce expenses and expectations that Amazon Web Services contributes $10 billion in incremental revenues over the next two years. It now expects 2016 EPS of $10.05, versus a previous estimate of $7.88, and 2017 EPS of $17.56, compared with an earlier estimate of $12.97. The consensus estimate is currently calling for earnings of $5.45 and $9.86, respectively, according to FactSet.

This, in turn, is expected to contribute favorably to profit margins, says Kirjner. Bernstein estimates that gross margins could reach 36.41% in 2016 and 39.18% in 2017, higher than the current consensus estimates of 34.83% and 36.26%, respectively, as Amazon shifts to higher-margin businesses, such as AWS, Marketplace and Fulfillment by Amazon.

“We have high conviction that gross margin will continue its expansion, much faster than currently reflected in consensus estimates,” said Kirjner.

Last quarter, Amazon’s total operating expenses grew by 23%, but Bernstein said the growth in costs for AWS and its retail business are now “slowing significantly.” It also projects big declines in costs related to technology and content acquisition for Prime Video, which Amazon Chief Financial Officer Brian Olsavsky said, on an earnings call last month, negatively impacted gross margin.

Amazon’s gross margin improved by 300 basis points in its most recent quarter despite the higher content costs. Olsavsky said that was a reflection of strong growth at AWS, however Kirjner warned in a note to clients this week that AWS revenues will likely “slow down as they grow,” thus underscoring the importance of improving efficiencies across Amazon’s business. 

Do you agree with this target price?