We have upgraded Amazon.com (AMZN) to Outperform based on indications that the company’s sales in the holiday season will be much stronger than we had originally expected.

The shares have jumped 7.0% over the past week and were up 2.7% yesterday since we upgraded the stock. We believe there is further upside and encourage investors to accumulate shares.

Marketing firm Mercent reported that Amazon.com saw a 47% sales increase in November, versus 33% increase for the overall online shopping market. According to SpendingPulse, the e-commerce industry rose 12.3% in November. Overall, electronic goods witnessed the strongest growth, with revenue increasing 6.6% followed by jewelry, which was up 4.6%.

Amazon’s e-reader, Kindle, is doing particularly well. Kindle has benefited from the non-availability of competing products, such as Barnes & Noble’s (BKS) Nook and Sony’s (SNE) Reader.  Although e-readers are an emerging product category, Amazon has declared that the Kindle is the hottest selling item across all its stores.

According to Forrester’s research, three million e-book readers will be sold in 2009, 30% of which will be in the holiday season. Considering the opportunity and shortage at competitors, the Kindle should continue to do extremely well.

Additionally, e-book reader sales are expected to grow to six million units in 2010 and 30 million units by 2013, according to research firm in-Stat. Although many lesser-known products will enter the market, we expect Kindle sales to continue growing over the next few years.

The company’s international business is also very strong. This segment continued to witness double-digit year-over-year growth throughout the recession, balancing out the softness in the domestic business. Profits have also increased, as International is a higher-margin business.

Although competition in online retail is heating up, which has the potential to weaken prices and lower margins, we think the company has the market position and financial muscle to outgrow others in the space.

Zacks Investment Research

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