Amazon Can Go Higher: Citi

At least somebody is getting a V-shaped recovery.

Back in early November, Citi analyst Mark Mahaney downgraded the online retailer which made some sense at the time since its shares were slumping and the company was slashing guidance. He downgraded at $52, and by Nov. 20 shares had fallen to around $35.

But then a funny thing happened: Amazon shares came roaring back. 

Since the start of the year, Amazon shares have already rebounded more than 50 percent to just above $78. After that run (which, compared to the rest of the market, could easily seem overheated) is it time to pare back? No, says Mahaney. Unlike other recent upgrades, he says Amazon isn't  "things are getting Less Worse" call. Below we sum up his 3 reasons to keep buying AMZN:

1) Margins could recover faster than expected. Lower retail discounting, more efficient operations and a better return on marketing cash could all help push results above expectations. 

2) Who else are you going to buy? Mahaney says Amazon's organic revenue growth is likely to hit 23 percent, about double Google's and a world away from falling revenue at eBay and Yahoo.

3) Top-line growth may be more sustainable. International growth, less competition (eBay again), and, yes, the Kindle, could all surprise on the upside, he says.

The stock is pricey, no doubt. But here's Mahaney's valuation case:

AMZN has the highest P/E (40X on ’09 Adjusted EPS of $1.94) and among the highest P/FCF (26X ’09) among Mid & Large Cap Net stocks. But given our outlook for accelerating operating income (30%) and normalized FCF (40%+) growth in ’10 – without assuming major margin expansion – we believe relatively high multiples can sustain.