After Earnings, Is Amazon Stock a Buy, a Sell, or Fairly Valued?

Amazon released its third-quarter earnings report on Oct. 31. Here’s Morningstar’s take on Amazon’s earnings and stock.

Key Morningstar Metrics for Amazon

• Fair Value Estimate: $200.00
• Morningstar Rating: 3 stars
• Economic Moat: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of Amazon’s Q3 Earnings

• We are raising our fair value estimate for Amazon to $200 per share from $195 after the company reported solid first-quarter results. The firm’s fourth-quarter outlook was generally aligned with our estimates. Changes to our model are minor but center around continued near-term profitability improvements. Overall results are pretty consistent with recent quarters.
• Retail demand trends remain unchanged over the last 18 months, with e-commerce performing well but showing signs of consumer stress. Third-quarter revenue grew 11% year over year as reported to $158.9 billion, compared with the top end of guidance at $158.5 billion. Relative to our estimates, online stores, subscription services, and Amazon Web Services performed best, while third-party seller services and advertising modestly lagged.
• Margins have been consistently stronger than anticipated over the past year or two, and we continue to believe there is room for expansion as the multi-hub strategy continues to unlock efficiencies. Third-quarter profitability was outstanding, with operating profit at $17.4 billion, compared with the high end of guidance at $15.0 billion. This resulted in an operating margin of 11.0%, compared with 7.8% a year ago.

Fair Value Estimate for Amazon

With its 3-star rating, we believe Amazon’s stock is fairly valued compared with our long-term fair value estimate of $200 per share, which implies a 2024 enterprise value/sales multiple of 3 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 (along 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.

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.

Given that the company is still in a rapid growth and heavy investment phase, we do not expect it to pay dividends or repurchase shares. The company is acquisitive, but given its size, we characterize all acquisitions throughout its history as tuck-in, including the largest deal of $14 billion for Whole Foods in 2017 and the $8 billion MGM deal in 2022. We expect the focus to remain on growth, including heavy investment in AWS and delivery.

Read more about Amazon’s financial strength.

Risk and Uncertainty

We assign Amazon an Uncertainty Rating of Medium. The firm must protect its leading online retailing position, which can be challenging as consumer preferences change, especially postcovid (as consumers may revert to prior behaviors), and as 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.

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 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 dampen free cash flow growth. Also, Amazon’s penetration into some countries might be harder than in the United States because of inferior logistical networks.
• Amazon may not be as successful in penetrating new retail categories, such as luxury goods, because of consumer preferences and an improved e-commerce experience from larger retailers.

This article was compiled by Kayleigh Hall.