Firm notes they believe that current valuations give Amazon insufficient credit in three areas. First, they think consensus revenue growth estimates of 32% YoY for 4Q:09 and 25%YoY for 2010 are too low. They think Amazon's revenues will re-accelerate to 41% YoY in the seasonally high 4Q:09 and average at least 35% in FY2010 (versus 28% for FY 2009) driven by a) the higher spending power of Amazon customers, which they think has been underestimated; and b) the company's 30 new product category introductions in 2009.

Second, Sanford thinks consensus GAAP operating margins of 4.6% in 4Q:09 and 5.1% in 2010 have also been underestimated. They expect GAAP operating margins to reach 5.3% in 4Q:09 and 5.4% in 2010 driven by: a) the company's improved ordering and safety stock algorithms and b) a growing share of apparel in the mix.

Third, although they see some risks from increased capital expenditures, they think the market is underestimating the strength of Amazon's free cash flow in 4Q:09 and in 2010 in particular the benefit of negative working capital, which they think will boost free cash flow by just over $1 billion in 2010. Accordingly the firm is increasing their 4Q:09 (GAAP) earnings estimate to $2.04 and their FY 2010 (GAAP) estimate to $3.07. Firm forecasts that 52% earnings growth will enable Amazon to maintain a 46x GAAP P/E multiple on 2010 earnings ex-cash (or 52x 2010 total earnings) giving them new price target of $160, which is also supported by firm's DCF model.

- Sanford expects revenue re-acceleration to continue through 2010: They think 4Q:09 revenues will come in at just under $9.5 billion or 41% YoY in 4Q:09 and slightly exceed $33 billion or growth of 35% YoY in 2010 thanks to: a) faster than expected revenue growth – especially the N. American media business: b) continued expansion into new high growth categories; c) strong overseas growth boosted by a currency tailwind in 2010; and d) higher than average discretionary spending from the company's superior consumer demographics.

- Sanford expects sustainable improvements to both gross and operating margins.