Pachter Lifts PT On Amazon To $435, Calls AWS Profits 'Impressive'

In a report published Friday, Wedbush analyst Michael Pachter reiterated a Neutral rating on shares of Amazon.com, Inc. AMZN with a price target raised to $435 from a previous $395 following the company's first quarter results in which the company proved its AWS (Amazon Web Services) segment is now a "significant" part of the business. During the quarter, AWS generated $1.566 billion of revenue while contributing $265 million of non-GAAP operating profit. Pachter noted some investors had expected AWS to be generating revenue at a higher rate, while some investors were also working under the assumption the business would be unprofitable. "We believe that initially, Amazon built out this business for its own purposes (including the delivery of streaming video for Prime members), as it was able to partially subsidize its capital and operating expenditures by charging its customers for the use of its services," Pachter wrote. "We were surprised that AWS was profitable in both 2014 and in Q1:15; it is important to note that in Amazon's supplemental schedules, year-over-year changes in operating income for the segment were left blank, suggesting to us that AWS was unprofitable in 2013. We believe Amazon's intent to expand AWS is clear, and we expect the operating margin to expand going forward." Pachter said that notwithstanding Amazon's "improved" segment reporting, its financials are still "confusing." The company's investment in streaming video and music along with consumer electronics devices is "unclear" and the analyst estimates the impact of these initiatives to exceed $1 billion per quarter. However, when Amazon achieves a steady state level of spending, it will deliver "significant" operating leverage. Bottom line, Pachter stated that it may take some time before Amazon's earnings per share grows sufficiently to justify its share price, his higher multiple is now justified following confirmation that AWS is profitable.