2 Undervalued Tech Stocks

eBay and Amazon are considered undervalued by Morningstar equity analysts - and they both have 'moats', meaning they have a sustainable advantage over peers

R.J. Hottovy, CFA 31 July, 2014 | 10:57AM
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Amazon (AMZN)

Amazon has played a prominent role in the structural shift away from brick-and-mortar retail, and it may lay waste to several other retailers in the years to come. Without the cost burden of physical stores, Amazon can price below traditional rivals and drive recurring traffic online. Even with the threat of online sales tax collection, we believe Amazon can maintain its value proposition through other means, including adjustments to shipping policies or Amazon Prime. Aided by the network effect inherent in 250 million active users and recent fulfilment infrastructure, technology, and content investments, Amazon owns one of the wider economic moats in the consumer sector and will likely remain a disruptive force within the retail, digital media, and cloud computing categories.

Amazon's growth potential is undeniable. Key top-line metrics, including active users (which have grown at a 22% CAGR the past five years), total physical and digital units sold (38% CAGR), and third-party units sold (48% CAGR) continue to outpace global e-commerce trends, suggesting that Amazon is gaining market share while fortifying its network effect. Nevertheless, based on operating margins of 1.0% in 2013 (2.7% excluding stock-based compensation and amortization of intangibles), our fair value estimate seemingly requires a leap of faith based on whether the company will be able to monetize its explosive growth.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Amazon.com Inc3,446.57 USD1.59Rating
eBay Inc72.41 USD-6.76Rating

About Author

R.J. Hottovy, CFA  is a director of equity analysis with Morningstar.