BMO Names Amazon New Top Pick, Downgrades Alphabet

Daniel Salmon of BMO Capital Markets downgraded shares of Alphabet Inc GOOG GOOGL from Outperform to Market Perform with a price target lowered from $1,005 to $880. Coinciding with Google's downgrade, the analyst named Amazon.com, Inc. AMZN as the firm's new top pick.

Salmon reiterated an Outperform rating on Amazon's stock with a price target boosted from $900 to $1,200 for one key reason that may be underappreciated by investors: advertising.

New Advertising Battle: Amazon Versus YouTube Versus Facebook

Salmon maintained an Outperform rating on Alphabet's stock in late March when he argued that YouTube's advertising scandal should pose no risk to the long-term story. The analyst reiterated this view in his latest note and suggested that brands boycotts against advertising on YouTube's platform could come to an end in the coming weeks and the total impact to Google could be in the "low hundred millions."

Nevertheless, part of Alphabet's long-term story assumes that the lucrative ad wars battle would pit just Google against Facebook Inc FB. However, the analyst is now questioning this widely held thesis as Amazon's ad business is gaining momentum.

Amazon's Ad Business

According to Salmon, Amazon's Sponsored Products offers companies selling on its platform the ability to place ads alongside search results and on product detail pages. The analyst noted that the new business is gaining momentum and the segment's revenue could soar 65 percent in 2017 to $3.5 billion.

Moreover, Amazon's advertising business not only boasts high margins (EBITDA margins of 50 to 70 percent) but it could be easy for the company to grow the business. Specifically, Amazon already collects a huge amount of consumer purchase data which offers "tremendous" targeting opportunities for companies and brands.

Salmon also believes Amazon is an excellent position to not only take share from Google, Facebook and other online platforms but also offline marketing venues.

Finally, Salmon pointed out that Amazon's longer-term opportunity would be to monetize Alexa devices through paid searches but this is still in its very early stage.

Bottom line, Salmon is bullish on Amazon's stock given the early signs of optimism in the new high margin ad business.

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