High-risk call: Buy Amazon before earnings

Published Thu, Jan 22 20159:47 AM EST

Feel like taking a risk? Then this is the analyst call for you. BGC Financial's Colin Gillis upgraded Amazon late Wednesday, advising clients to buy the stock before earnings on Jan. 29, even after the analyst acknowledged the shares' poor track record after results and the absurdity of a company with such a giant market value that still loses money. "We have heard investing in Amazon likened to swimming in the deep end of the pool given that the company has a market capitalization of $137 billion and was not profitable in the last two quarters," wrote Gillis. "We also point out that Amazon has traded down by at least 8 percent after reporting earnings during the last four quarters." But the analyst believes Amazon will return to profitability this year—and maybe even as soon as this quarter—as book sales rebound and as its digital media ecosystem based on its Prime service takes hold, growing loyal viewers and purchasers of goods. Gillis projects a 10 percent-plus increase in the shares to $340 over the next 12 months. His non-GAAP earnings estimate of 50 cents a share for the fourth quarter is nearly double the Wall Street consensus. "After two quarters of GAAP income losses, we expect the company returns to profitability in the December quarter and we are modelling profitability for the March quarter," the report said. Amazon shares are down 25 percent over the last 12 months as many investors finally threw in the towel, frustrated with losses stemming from big investments in fulfillment centers, digital content and hardware. Read More Halftime trader: Stick by IBM after poor forecast To his credit, Gillis was negative on the shares going into 2014 as much of the Street remained on board with the Amazon story. Almost 80 percent of the 43 analysts that cover Amazon had a "buy" rating on the stock in January of last year before the shares dropped, according to FactSet. That enthusiasm has dulled a bit with just 63 percent of Wall Street recommending buying the shares today. "While we have historically been skeptical that Amazon was going to solve its shipping losses to produce an operating margin north of 5 percent, we now see enough signs of stabilization in shipping losses and maintain that the digital ecosystem has enough investment to be a force to help drive improved profitability," wrote Gillis. The analyst sees Amazon earning $1.41 on a GAAP basis in 2015, compared to the 90 cents-a-share Wall Street consensus. One more part of the note may give some risk-averse investors some pause: Amazon's valuation. Gillis gets to his 12-month price target by applying an astronomical multiple of 241 times his 2015 earnings estimate. "The company trades at an ultra-premium valuation, but we expect a rebound in the North American operating margin to drive profitability in the current quarter."

Amazon CEO Jeff Bezos discusses the Fire smartphone at a news conference in Seattle, June 18, 2014.

Jason Redmond | Reuters

Feel like taking a risk? Then this is the analyst call for you.

BGC Financial's Colin Gillis upgraded Amazon late Wednesday, advising clients to buy the stock before earnings on Jan. 29, even after the analyst acknowledged the shares' poor track record after results and the absurdity of a company with such a giant market value that still loses money.