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Analyst Blog

On Oct 7, 2016, Zacks Investment Research upgraded Amazon.com, Inc. (AMZN - Free Report) to a Zacks Rank #1 (Strong Buy). With a return of 56.6% over the past one year and encouraging revenue guidance for the third quarter of fiscal 2016, Amazon emerges as an attractive investment opportunity.

Encouraging Earnings

Amazon’s second-quarter earnings per share of $1.78 and revenues of $30.40 billion were ahead of the Zacks Consensus Estimate of $1.14 and $29.73 billion respectively. The North America and AWS segments were strong contributors while investments in international continued.

Buoyed by the better-than-expected results, the company provided an encouraging outlook for the current quarter. For the third quarter of fiscal 2016, management expects revenues in a range of $31 billion to $33.5 billion (up 6.1% sequentially and 27.2% year over year).  

AMAZON.COM INC Price and Consensus

Amazon Web Services (AWS) Holds the Key

Amazon Web Services is the cash cow for Amazon. The business generates much higher margins than retail, so it has a very positive impact on Amazon’s profitability. The business contributed $2.89 billion in the last quarter, taking the revenue runrate to over $11.5 billion, representing sequential and year-over-year growth of 12.5% and 58.2%, respectively.

An important customer win in the last quarter was Salesforce (CRM - Free Report) , which selected AWS as its preferred public cloud infrastructure provider to run its core services like Sales Cloud, Service Cloud, App Cloud, Community Cloud, and Analytics Cloud. Amazon ended the quarter with 35 available zones across 13 infrastructure regions. Notably, the Mumbai (India) region was added in the last quarter, the sixth region in the Asia Pacific.

We remain optimistic about the functionality, partner ecosystem and experience AWS offers and believe this will lead to continued customer wins.

Internet of Things (IoT) Showing Prospects

One area of potential growth is devices and IoT. Amazon has partnerships with several IoT hardware makers to integrate Alexa (the personal assistant Echo uses). The idea seems to be to make Alexa the central point connecting IoT devices used in any household.

With 50% of Americans having Prime memberships (meaning that they are heavy Amazon users), Amazon can leverage this position to drive penetration. It’s also an important method of collecting household information, since Alexa is used to listening to commands and storing everything that it hears in the cloud.

Stocks to Consider

Besides Amazon, investors may consider Intel Corporation (INTC - Free Report) and Applied Materials, Inc. (AMAT - Free Report) . All sport a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Intel has seen estimates for the full year rise over the past 30 days by 3.6%. For Applied Materials, estimates rose 13.6% in the last 60 days.

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