Piper Jaffray Says Buy Amazon.com, Inc. (AMZN) on Pullback, Boosts Price Target on Expedia Inc (EXPE)

Piper Jaffray analyst Michael Olson has bullish eyes on Amazon.com, Inc. (NASDAQ:AMZN) and Expedia Inc (NASDAQ:EXPE) after these two tech players delivered a round of quarterly earnings yesterday evening. Interestingly enough, the very aspect that has Amazon investors skittish today- operating margin weakness- to Olson is an encouraging indicator that the online auction and e-commerce leader is right on track with wise investments to keep the company ticking for time to come. Meanwhile, the analyst sees fit to get even more confident on Expedia after a quarter that saw room nights impress beyond expectations, with marketing initiatives keeping the travel giant on track for success. (To watch Olson’s track record, click here)

Let’s dive in :

Amazon’s Weakness Actually One of Its Best Strengths

Amazon shares are currently falling 3% after the company delivered a second-quarter turn-out that missed on operating margin outlook. However, one investor’s stinging disappointment is another’s ironic staple in a bullish case that Amazon’s investments mark a pathway to “strength” rather than a fatal flaw. Olson certainly emerges as the latter here, urging shareholders to eye this temporary share stumble as a compelling chance to buy the stock- a stock that he believes has true long-term margin and free cash flow (FCF) potential down the road.

Despite the trade-off and mixed print, the analyst reiterates an Overweight rating on shares of AMZN with a $1,200 price target, which represents an 18% increase from where the stock is currently trading.

Not all tolled harshly for the online auction and e-commerce leader, as Olson points out Amazon posted $38.0 billion in revenue, outclassing consensus of $37.2 billion on back of retail unit growth as well as “virtually no deceleration” in Amazon Web Services (AWS).

Olson comments, “Shares traded off 3% in the aftermarket as the company reported GAAP operating margins at the low end of its guidance range and guided the midpoint of Q3 op margin to -0.3% vs. expectations for 2.3% as the result of heavy investment in media, fulfillment capacity buildouts, and accelerating headcount growth in engineering and advertising sales. Our main takeaway is that stock weakness around margin-related misses are typically good buying opportunities for AMZN – we do not see this margin guidance miss vs. unguided expectations as a sign that Amazon’s long-term margin expansion is at risk. Equally important, we note that this margin impact is occurring as the business actually accelerates in retail.”

From the analyst’s eyes, Amazon remains in excellent shape, with retail unit growth revealing “surprising strength” this quarter, accelerating from 24% last quarter to 27% in the second quarter, most likely due to impressive Prime adoption. Meanwhile, Fulfillment by Amazon (FBA) unit growth hit past 40%, and the analyst anticipates “another year of fulfillment expansion” will be a big catalyst for outlook seeking year-over-year margin compression come third quarter. Ultimately, the analyst wagers the very weak spot disconcerting most investors today is in fact the company’s secret weapon, concluding, “An irony in the Amazon margin story is that we don’t believe investors would disagree with any of the initiatives to which Amazon is committing significant CAPEX or OPEX dollars.”

TipRanks analytics demonstrate AMZN as a Strong Buy. Out of 24 analysts polled by TipRanks in the last 3 months, 22 are bullish on Amazon stock while 2 remain sidelined. With a return potential of nearly 10%, the stock’s consensus target price stands at $1,147.50.

Expedia’s Q2 Quarterback: Room Night Growth

Expedia handed in its second quarter financial results yesterday after the bell, and in reaction, Olson keeps singing the travel giant’s praises, giving real kudos to the best performer: stellar room night growth. In fact, investors mainly keep their eyes on this metric, one that handily topped the Street’s expectations, leaving Olson quite content with the giant’s standing in the market.

In reaction, the analyst reiterates an Overweight rating on EXPE while lifting the price target to $173, which represents a 10% increase from current levels.

For the second quarter, the travel giant saw bookings reach $22.84 billion, compared to the Street’s forecast of $22.87 billion, and EBITDA of $392.5 million, trouncing the Street’s $373 million estimate. Moreover, room night growth experienced a 21% year-over-year surge, knocking out the consensus projection calling for 16.4% and the analyst’s expectation of 14%. The Expedia management team maintained EBITDA outlook for the year between $1.70 and $1.860 billion, indicating 10% to 15% in year-over-year growth, compared to consensus of $1.85 billion, or 14% year-over-year growth.

Olson opines, “For FY17, Expedia will continue to invest in cloud migration, marketing for hotels.com and Expedia, and HomeAway product development & marketing. Higher room night growth acceleration than expected was primarily driven by the initial impact of increased variable marketing initiatives. Given the success of this strategy, the company intends to remain aggressive on continued marketing spend.”

Overall, room night growth was Expedia’s strongest player this past quarter, as Olson cheers, “Better-Than-Expected Room Night Growth Acceleration Driven by Solid Global Trends and Easy Comps,” surmising, “Expedia indicated that the underlying travel macro environment is solid and every major region showed q/q improvement. Room night growth, the metric Expedia investors have been most focused on in recent quarters, was well above expectations, coming in at 21% y/y vs. the Street at 16.4%. Room night growth had a relatively easy comp, following the company’s integration issues with Orbitz in Q2 and Q3 of 2016.”

TipRanks analytics exhibit EXPE as a Strong Buy. Based on 14 analysts polled by TipRanks in the last 3 months, 11 rate a Buy on Expedia stock while 3 maintain a Hold. The 12-month average price target stands at $164.64, marking a nearly 7% upside from where the stock is currently trading.

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