Amazon AMZN is set to release its first-quarter earnings report on May 1. Here’s Morningstar’s take on what to look for in AMZN’s earnings and stock.
Key Morningstar Metrics for Amazon
• Fair Value Estimate: $240.00
• Morningstar Rating: ★★★★
• Economic Moat: Wide
• Morningstar Uncertainty Rating: Medium
Earnings Release Date
• Thursday, May 1, 2025, after the close of trading
What to Watch for in Amazon’s Q1 Earnings
• Tariffs are more directly impactful, particularly on first-party selling. We estimate about 60% of cost of goods sold is from imports, and a third of that is from China, and thus tariffs could be meaningful. However, Amazon is one of the biggest retailers in the world, and should be able to negotiate the best terms from suppliers, and we thus expect Amazon to actually gain share during these trade wars.
• Third-party selling will be a matter of higher prices, which should drive lower volumes, but it’s not clear which force will be greater. Tariffs during Trump’s first term were largely a non-issue for Amazon from a financial standpoint, even if management was scrambling to execute in challenging circumstances.
• Guidance will be more important than usual, since there are so many moving parts. Amazon only guides one quarter at a time, so there will be less to pick apart.
• We are looking for information on artificial intelligence and related data points.
• Reports have surfaced a couple times in the last couple months that Amazon is slowing its capex plans.
• We are looking for any insights into additional improvements within operations. Margin improvements based on efficiency gains have been a major theme for Amazon for the last year, and we expect more.
Amazon.com Stock Price
undefined
Fair Value Estimate for Amazon
With its 4-star rating, we believe Amazon’s stock is fairly undervalued compared to our long-term fair value estimate of $240 per share, which implies a 2025 enterprise value to sales multiple of 4 times and a 2% free cash flow yield.
Over the long term, we expect e-commerce to continue to take share from brick-and-mortar retailers. We further expect Amazon to gain share online. We believe that over the medium term, covid pulled forward some demand by changing consumer behavior and better penetrating some retail categories, such as groceries, pharmacy, and luxury goods, that previously had not gained as much traction online. We think Prime subscriptions and the accompanying benefits, combined with selection, price, and convenience continue to drive the retail story. We also see international as being a longer-term opportunity within retail. We model total retail-related revenue growing at an 8% compound annual growth rate over the next five years.
Read more about Amazon’s fair value estimate.
Economic Moat Rating
We assign a wide moat rating to Amazon based on network effects, cost advantages, intangible assets, and switching costs. Amazon has been disrupting the traditional retail industry for more than two decades while also emerging as the leading infrastructure-as-a-service provider via Amazon Web Services. This disruption has been embraced by consumers and has driven change across the entire industry as traditional retailers have invested heavily in technology in order to keep pace. Covid-19 has accelerated change, and given the company’s technological prowess, massive scale, and relationship with consumers, we think Amazon has widened its lead, which we believe will result in economic returns well in excess of its cost of capital for years to come.
Amazon has amassed significant technology and process knowledge, which we believe is an intangible asset for the firm as a whole and also for AWS. These assets could also apply to the logistics aspect of the retail business. The company expanded its distribution network by roughly 50% in 2020 while managing through a global pandemic. Given the size of its footprint, this is a monumental achievement and speaks to the company’s ability to quickly plan, construct, and expand facilities based on specific needs.
Read more about Amazon’s economic moat.
Financial Strength
We believe Amazon is financially sound. Revenue is growing rapidly, margins are expanding, the company has unrivaled scale, and the balance sheet is in great shape. In our view, the marketplace will remain attractive to third-party sellers, as Prime continues to tightly weave consumers to Amazon. We also see AWS and advertising driving overall corporate growth and continued margin expansion.
As of Dec. 31, 2024, Amazon had $101.2 billion in cash and marketable securities, offset by $52.6 billion in debt. We also expect free cash flow generation, which suffered during COVID as the company invested heavily in facility expansion, content creation, and its transportation network, to be pressured in the near-term from heavy capital expenditure investments for AWS. As this current investment cycle eases, we see a return to more normal cash flow generation levels.
Read more about Amazon’s financial strength.
Risk and Uncertainty
We assign Amazon a Morningstar Uncertainty Rating of Medium. Amazon must protect its leading online retailing position, which can be challenging as consumer preferences change, especially post-covid-19 (as consumers may revert to prior behaviors), and traditional retailers bolster their online presence. Maintaining an e-commerce edge has pushed the company to make investments in nontraditional areas, such as producing content for Prime Video and building out its own transportation network. Similarly, the company must also maintain an attractive value proposition for its third-party sellers. Some of these investment areas have raised investor questions in the past, and we expect management to continue to invest according to its strategy, despite periodic margin pressure from increased spending.
The company must also continue to invest in new offerings. AWS, transportation, and physical stores (both Amazon branded and Whole Foods) are three notable areas of investment. These decisions require capital allocation and management focus and may play out over a period of years rather than quarters.
Read more about Amazon’s risk and uncertainty.
AMZN Bulls Say
• Amazon is the clear leader in e-commerce and enjoys unrivaled scale to continue to invest in growth opportunities and drive the very best customer experience.
• High-margin advertising and AWS are growing faster than the corporate average, which should continue to boost profitability over the next several years.
• Amazon Prime memberships help attract and retain customers, who then spend more with Amazon. This reinforces a powerful network effect while bringing in recurring and high-margin revenue.
AMZN Bears Say
• Regulatory concerns are rising for large technology firms, including Amazon. Further, the firm may face increasing regulatory and compliance issues as it expands internationally.
• New investments, notably in fulfillment, delivery, and AWS, should damp free cash flow growth. Also, Amazon’s penetration into some countries might be harder than in the US due to inferior logistic networks.
• Amazon may not be as successful in penetrating new retail categories, such as luxury goods, due to consumer preferences and an improved e-commerce experience from larger retailers.
This article was compiled by Gautami Thombare.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
