Why Amazon has so many fans on Wall Street

If there's a stock that's performing with amazing strength, it is, well, Amazon (AMZN). But with its astronomical stock price rise, nearly doubling to an all-time high of $1,017 share from $682 last July, is it likely start petering out rather than keep galloping?

No doubt, a lot of investors who have piled up substantial winnings from the stock have been taking profits. Amazon's recent $13.7 billion purchase of Whole Foods (WFM) was one reason for those selling shares, on the argument that the huge acquisition might stunt Amazon's rapid growth. 

But from the way the stock is behaving, no massive selling has yet occurred. It closed on Friday still above the $1,000-a-share threshold at $1,003.74. That's partly because the smart money and big institutional shareholders haven't been turned off by Amazon's acquisitions and the stock's powerful advance. Wall Street continues to favor the shares and remains optimistic that CEO Jeff Bezos' grand vision to create a innovative corporate monster is going very well, indeed.

"Overall, we view the price paid by Amazon for Whole Foods -- representing a forward enterprise value/EBITDA multiple of 11 times -- as reasonable, and we plan to raise our fair value estimate to $1,200 a share from $1,050," said R.J. Hottovy, consumer strategist at Morningstar. The increased fair-value estimate accounts for "contributions from the Whole Foods acquisition, new growth opportunities and cost synergies," he pointed out.

Hottovy expects Amazon's growth to continue. He has raised his five-year revenue growth forecast to 22 percent from 19 percent, with a five-year GAAP operating margin outlook moving up to 7 percent to 8 percent from his previous model's 7 percent. And he thinks the Whole Foods acquisition is a positive move.

Although it's a major shift in Amazon's retail strategies, "we believe it could make Amazon even more integral in consumers' lives -- bolstering its network effect in the process -- while becoming a major headache for other retailers." 

Amazon is the "most disruptive force to emerge in retail in several decades," said Hottovy, and its "operational efficiency, network effect, and a brand of intangible asset built on customer service provide it with sustainable competitive advantages that traditional retailers cannot match." 

Analyst Tuna Amobi of CFRA Research, who maintains his "buy" recommendation on the stock, said the Whole Foods acquisition could presage a major long-term disruption of the grocery business as Amazon "further leverages its technology, logistics and fulfillment infrastructure." 

He sees additional market share gains versus traditional retailers in Amazon's core electronics and general merchandise offerings due mainly to its focus on providing "value to consumers through selection, price and convenience."

Amobi forecasts a huge leap in future earnings. Excluding results from the Whole Foods acquisition, he expects Amazon to earn $7.12 a share in 2017 and $12.55 in 2018, way up from last year's $4.90. His forecasts include stock-based compensation and interest expenses and taxes. 

The CFRA analyst expects net sales to increase about 22 percent in 2017 and 21 percent in 2018, assuming some currency headwinds. In 2016, revenues totaled $136 billion, up from $107 billion in 2015.

Over the next two years, Amobi forecasts gross margins widening significantly on favorable shifts in Amazon's product mix and an increase in third-party sellers. Results should also benefit, he added, from improved profitability in its fast-growing Amazon Web Services cloud-computing unit.

Michael Pachter, equity analyst at Wedbush Securities, who rates Amazon as "outperform," expects the company to use Whole Foods stores as distribution centers for its wide array of products. As of April 9, Whole Foods had 440 stores in 42 states in the U.S., with 12 more in Canada and nine in the U.K.

"The food stores would be ideal outlets for popular Amazon products, such as Echo, Fire TV and Kindle, given the favorable demographics of the customer base," said Pachter. So he expects the Whole Foods acquisition to add significantly to Amazon's revenue base. 

Pachter has a price target for Amazon's stock of $1,250 a share because he expects the company to continue increasing its profits even as it persists in investing in overall growth.

So what area could be the next target for the acquisitive Amazon? JPMorgan (JPM) analysts believe it might turn its attention to the food service distribution sector and the independent restaurants business.

"Now that Amazon has opened the door to transformative -- and high nominal cost -- acquisitions," a logical future, if not the very next step, for Amazon would be "to begin a selling and distribution platform to independent restaurants," said John Ivankoe, equity analyst at JPMorgan Securities. He thinks Amazon will add to its focus on the at-home consumer and include independent restaurants in its customer set.

Argued Ivankoe: "Our perspective is that the independent restaurant of tomorrow -- even of today -- will prefer digital engagement, appreciate custom-displayed and -priced offers based on ordering habits, and benefit from the price transparency Amazon will provide."