Morgan Stanley: Amazon's Q1 Print Shows It's 'Just Getting Started'

Amazon.com, Inc. AMZN reported first-quarter results Thursday that exceeded even the company's own expectations, according to Morgan Stanley.

The Analyst

Morgan Stanley's Brian Nowak maintains an Overweight rating on Amazon's stock with a price target lifted from $1,550 to $1,700.

The Thesis

Amazon's Q1 report was highlighted by strong top-line momentum, and the company's growing scale is driving profitability, Nowak said in a Friday note. (See the analyst's track record here.)

Amazon's GAAP operating profit came in $1.9 billion ahead of expectations, and the high end of its second-quarter GAAP operating profit guidance was $1.9 billion ahead of the analyst's estimates.

More important to the Amazon bull case is the fact that Amazon's high-margin revenue businesses, including AWS, continue to accelerate, the analyst said:

The cloud business saw its revenue accelerate from 45 percent in the prior quarter to 49 percent.
Subscription revenue accelerated from 49 percent to 60 percent.
Other" revenue including advertising accelerated from 62 percent to 73 percent.

The three business lines likely added $3.5 billion of gross profit year-over-year and give Amazon incremental "growing buckets of dollars" to re-invest in the business, Nowak said. It's reasonable to conclude that Amazon's high-margin businesses are still in "day one" and "just getting started," the analyst said.

Amazon's business is operating at an "even higher level" than the company expected, as its GAAP operating profit beat the high end of its guidance by $927 million — the biggest beat in over seven years.