Three reasons why Amazon has room to run

Analyzing Amazon's stock

Amazon shares have jumped 20 percent in the first six weeks of 2015, and there's good reason to believe the stock has more room to run, Morningstar analyst R.J. Hottovy told CNBC on Wednesday.

In fact, shares could reach $400 if Hottovy's fair value estimate on Amazon's stock price comes to fruition. What's behind the potential upside? Hottovy highlighted three big reasons.

First, without the cost burden of physical stores, Amazon can still charge less than brick-and-mortar retailers. And there's been a shift among consumers to prefer expediency over price now that retailers have been trying to match Amazon prices, Hottovy said on CNBC's "Tech Bet. "

"That puts them at a very strong competitive advantage across an even wider number of products than any other traditional retailer can match," Hottovy said.

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Second, preferred subscription service Amazon Prime has helped increase operating margins, and Hottovy expects its estimated 35 million members to grow.

"There's a psychological aspect to Amazon Prime, where as once you've locked in to that membership fee for the year, you feel compelled to use it and keep within Amazon's ecosystem," Hottovy said.

An worker picks orders at an Amazon fulfillment center in Tracy, Calif.
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Hottovy said Amazon has been making back the $99 Prime membership fee in actual operating profit, but that the benefit has been masked by investments Amazon has made in technology or distribution centers. He expects Prime to block out competitors and margins to expand as the membership base continues to grow.

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Lastly, the company's first quarter rebound in 2015 has given investors something to celebrate after a rough 2014, especially after a high-profile flop with the Amazon Fire phone.

"Especially on the heels of the failure that they had with the Fire phone, I think the company has really taken a step back and refocused itself on its core e-commerce and [Web services] businesses, which is a good thing for investors," Hottovy said.

Disclosure: Hottovy does not own shares of Amazon.

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