Amazon.com can grow revenue more than the market expects thanks to its ballooning Prime membership, RBC Capital Markets analyst Mark Mahaney said Friday.
RBC increased its price target on Amazon to $705 from $650 based on momentum in its Amazon's Prime business. It was trading at more than $524 a share on Friday. The firm's third annual Amazon consumer survey suggested U.S. Prime adoption has risen from 25 percent of customers in 2013 to 40 percent today.
The firm now believes Amazon has 50 million U.S. Prime subscribers and 60 million to 80 million global subscribers. Amazon does not make those figures public.
That's important because the longer customers stick with Amazon Prime, the more they spend, Mahaney said. RBC's survey indicates that 49 percent of first-year Prime members and 68 percent of year-four subscribers spend at least $800 on Amazon each year.
"That means that the revenue growth should be sustainable for longer than people realize," Mahaney told CNBC's "Squawk on the Street."
During Amazon's second quarter conference call, management said growing Prime adoption was one factor behind acceleration in domestic and international revenue growth. Second quarter 2015 sales increased 20 percent from the prior year to to $23.18 billion, exceeding expectations.
Amazon said Prime is benefiting from a "flywheel" effect.
Essentially, it's becoming more attractive to customers as it grows the number of items available for two-day shipping. That in turn is causing more vendors who want their products to be eligible for Prime status to participate in Amazon's fulfillment. Prime then becomes even more attractive to customers, feeding a cycle of momentum.
Investors still need to take a long-term perspective on shares of Amazon, Mahaney said. The stock has traded at a lofty average of 35 to 40 times forward earnings since 2007, according to RBC.
"The market is willing to and should be willing to look out several years and look at these pools of profit that they're building up in their core retail business and in AWS," Mahaney said, referring to Amazon Web Services, the company's cloud-computing business.
"You do that, you discount it back, you can get to materially higher price levels from where the stock is today."
RBC believes Amazon's core retail business can reach $27 to $45 in earnings per share within 10 years. In its last quarter, it reported EPS of 19 cents.
Mahaney also sees profit margins expanding as Amazon tapers off a roughly five-year investment cycle for new U.S. distribution centers. That investment is what has allowed Prime and same-day delivery to succeed, he added.
DISCLOSURE: Neither the analyst nor his family owns shares of Amazon. RBC Capital Markets makes a market in Amazon.com securities.