Amazon Shares Still Undervalued Despite Rally

Shares in the e-commerce giant have spiked after a strong earnings report, but Morningstar analysts think they are still below their fair value

Ollie Smith 4 February, 2022 | 10:46AM
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Amazon shares jumped 12% in pre-market trading following robust final quarter 2021 earnings and first-quarter 2022 earnings guidance, continuing the share price volatility seen across US tech stocks this week.

Despite the share bounce to $3,120, Morningstar senior equity analyst Dan Romanoff says the company is still undervalued.

“We are maintaining our fair value estimate for wide-moat Amazon at $4,100 per share, and despite shares rising 12% after hours, we still view shares as undervalued,” Romanoff says.

A price hike on Prime subscriptions will hand Amazon (AMZN) a tailwind this year, Morningstar analysts say. The announcement on Prime pricing followed strong Q4 revenue growth of 9% to $137.4 billion.

Amazon share price

“We think the highlight of the quarter was Amazon's plan to raise prices in the US on Prime to $139 from $119 beginning on February 18 for new members, underscoring its pricing power and highlighting Prime as a revenue driver," Romanoff adds.

Amazon’s fourth-quarter 2021 operating profit came in at $3.5 billion, despite the fact it paid $4 billion in higher wages, employee incentives, and shipping costs. Original guidance had suggested an operating profit of up to $3 billion. Its operating margin was 2.5%, down on the 5.5% seen in the same period last year.

Despite various disruptive trends, Romanoff believes the company is still well-positioned for the future. Chief among the reasons is its cloud business, AWS.

“Amazon will continue to invest heavily in Amazon Web Services, or AWS, fulfilment capacity and delivery, although we see these beginning to ease in the second half of 2022,” he says.

“Overall, we do not see issues with the long-term story as Amazon remains well positioned to prosper from the secular shift toward e-commerce and the public cloud over the next decade.”

Amazon is the latest large cap to report its earnings and outlook this week. This week shares in Meta Platforms plunged on missed earnings targets and a decline in the number of Facebook users for the first time in 18 years. On the flipside, Google parent Alphabet (GOOGL) was boosted by strong numbers and news of a stock split.

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Ollie Smith

Ollie Smith  is editor of Morningstar UK

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