Amazon (AMZN -1.27%) reported solid financial results for the first quarter on April 30. Revenue grew 13% over the year-ago quarter, and solid cost controls provided a massive boost to the company's profits.
After the report came out, Morgan Stanley analyst Brian Nowak maintained an overweight (buy) rating on the shares but increased the price target from $215 to $220, representing upside of 23% above the current share price.
Here's what's going right for Amazon, and why the stock could hit a new high in the next few years, if not sooner.
Why buy Amazon stock
Management is generating enormous upside for Amazon's profitability by more efficiently allocating inventory across its network of fulfillment centers and squeezing more efficiency out of capital spending. These efforts led to a net profit of $10.4 billion in the first quarter, a big jump from $3.2 billion a year ago.
Following the massive improvement on the bottom line, Morgan Stanley raised its forward estimates for operating income and earnings per share by about 10%. While the firm estimates that Amazon's North American retail business is still not profitable when excluding advertising revenue, which grew 24% year over year, it sees further upside for Amazon's profits from further cost efficiencies and accelerating growth in the high-margin Amazon Web Services cloud business.
It's not unreasonable to expect the share price to hit a new high. At $220, the shares would trade at 27 times trailing cash from operations per share, which would still be in the middle of the previous 10-year range for this valuation metric.
Considering the value underneath the shares, Amazon still looks like a great buy even after the run over the last year.
