Amazon Earnings: Stock Attractive After Sell-Off

Fair value estimate for the stock raised on better profit and cost forecasts

Dan Romanoff 2 August, 2024 | 11:38AM
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Amazon Prime

We are raising our fair value estimate for wide-moat Amazon to $195 per share from $193 after the company reported solid second-quarter results.

Key Morningstar Metrics for Amazon

• Fair Value Estimate: $195
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Amazon's Earnings

The company’s third-quarter outlook aligned with our revenue estimate and was better than our operating income estimate. Changes to our model are modest but center around continued profitability enhancements in the near term. Amazon continues to take strides in efficiency improvements throughout the network, which helps lower costs and improve delivery speeds and ultimately drives increased purchases by prime members. After a pullback that began in early July, we see shares as increasingly attractive.

AWS Ahead of Our Model

Overall demand trends remain unchanged over the last year or so, with e-commerce showing signs of consumer stress. Second-quarter revenue grew 10% year-over-year as reported, or 11% in constant currency, to $148.0 billion, compared with the guidance mid-point of $146.5 billion. Relative to our estimates, online stores and third-party seller services drove most of the miss, while all segments were slightly light. Amazon Web Services was nicely ahead of our model. The two key segments for long-term growth, AWS and advertising, increased 19% and 20% year on year, as reported, respectively. Amazon’s advertising growth continues to outpace its large internet peers, while AWS' growth accelerated sequentially for the fourth straight quarter.

Margins have been consistently stronger than anticipated over the past year, and we continue to believe there is room for expansion as the multihub strategy continues to unlock efficiencies. Second-quarter profitability was impressive, with operating profit at $14.7 billion, compared with the high end of guidance at $14.0 billion. This resulted in an operating margin of 9.9%, compared with 5.7% a year ago. The international unit generated positive operating profits for the second straight quarter, which we think is a harbinger for longer-term expansion.

 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Amazon.com Inc180.80 USD-3.06Rating

About Author

Dan Romanoff  is an equity research analyst on the technology, media, and telecommunications team for Morningstar in Chicago.

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