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Here’s why Amazon stock is up 42% in just 3 months

Daniel Roberts
Senior Writer

On February 9, Amazon stock (AMZN) hit its lowest point of 2016, at $482. This was a week after disappointing Q4 earnings sent shares tumbling.

But in the three months since that date, the stock has soared up 42%, an almost unprecedented gain.

It has some analysts saying that even in the $700s, the stock is undervalued. Bernstein, in a note this month, predicts the price could hit $1,000 before 2017. Almost across the board, analysts rate it a buy. Amazon is doing so well that it has Morgan Stanley, in a note last week, asking what might be “Amazon’s kryptonite,” since retailers are turning to social platforms like Facebook, Instagram, and Pinterest just to try to “offset the Amazon effect.” The stock hit an all-time high above $704 on May 10.

Amazon stock over the past few months.

So, what’s driving the climb? It began, of course, with Amazon’s first-quarter earnings that came out in April. The earnings were very, very good. The company beat expectations for revenue ($29.1 billion) and earnings per share ($1.07). The big story of the earnings was Amazon Web Services (AWS), which brought in $2.57 billion in revenue, up 64% from the first quarter of 2015.

AWS is also highly profitable, accounting for 56% of Amazon profit in the first quarter. And overall profitability, which has steadily increased in the past few quarters and is up to 3% most recently, is another driver of the stock right now. (MarketWatch last month called profitability “Amazon’s best new feature.”) The rise in profitability is “partly as a result of the AWS results,” says Jan Dawson of Jackdaw Research, “but it's also a sign that Amazon is perhaps easing up on investment just enough to allow some small profits to emerge again after a pretty lean period.”

There has also been, according to a Credit Suisse note last month, “A confluence of increasing selection, Prime adoption, and Leap Day” that helped Amazon achieve a knockout spring. But that’s not the only confluence.

There are some other positive notes in the Amazon air that make it appealing: Amazon launched a video-only subscription option, though critics have called it overpriced; Amazon Studios continues to buy up the rights to films as well as invest in its original series, as Amazon looks to compete with the many players in the original content wars (Netflix, HBO, Hulu, Sony PlayStation and even Apple); and operating costs, which grew 23% last quarter, are finally falling or about to fall across multiple areas including retail fulfillment centers and content acquisition for Prime Video.

And then there’s brick-and-mortar retail. The picture in that business isn’t pretty: Sports Authority is liquidating; City Sports, Aeropostale, Quiksilver; Eastern Mountain Sports, Bob’s Stores, and Sport Chalet are bankrupt; and Gap, J.C. Penney, Kohl’s, Macy’s, and Nordstrom have all reported disappointing earnings recently. While sad for nostalgic shoppers, all of this is good for Amazon.

Barring a bad surprise, expect Amazon shares to keep climbing in the short-term.

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Daniel Roberts is a writer at Yahoo Finance, covering sports business and technology. Follow him on Twitter at @readDanwrite.

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