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

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

Key Morningstar Metrics for Amazon

• Fair Value Estimate: $245.00
• Morningstar Rating: Medium
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: ★★★★

What We Thought of Amazon’s Q2 Earnings

Amazon reported second-quarter results that beat the high end of guidance on both the top and bottom lines. Revenue grew by 12% year over year in constant currency to $167.6 billion, while operating margin was 11.4% compared with 9.9% a year ago.

Why it matters: Results were clearly good, with upside on the top and bottom lines, which we think is positive against the macro backdrop. Trade deals are being inked rapidly, so our concerns about US tariffs have shrunk. Consumer buying behavior remains unchanged.

• Revenue in online stores, third-party sellers, subscriptions, and advertising came in ahead of our model, while Amazon’s physical stores underperformed. Amazon Web Services was largely in line. Advertising was impressive and helped buoy overall results once again.

The bottom line: We raise our fair value estimate to $245 per share from $240 based on the results and the mixed but generally solid guidance. The stock is trading down, which strikes us as an overreaction, and shares look attractive.

• While some might be disappointed by the AWS results, given the strong performance of peers, AWS faces the same capacity constraints and still came in ahead of our estimates for the first half of 2025.
• AWS margins, which were down noticeably from the first quarter, could also be weighing on the stock. The concern is valid, but profitability fluctuates for each segment and overall margins were strong. Overall, we think AWS margins can recover.

Coming up: Guidance is mixed compared with FactSet consensus estimates, with revenue ahead and profitability light. We have made only slight changes to our model based on performance and guidance.

• Satellite launch costs for Project Kuiper will likely pressure margins for a couple of quarters, while new AWS capacity coming online later this year should have a similar impact.

Fair Value Estimate for Amazon

With its 4-star rating, we believe Amazon’s stock is undervalued compared with our long-term fair value estimate of $245 per share, which implies a 2025 enterprise value/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-19 pulled forward some demand by changing consumer behavior and better penetrating retail categories that had not previously gained as much traction online, such as groceries, pharmacy, and luxury goods. 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 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 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 emerging as the leading infrastructure-as-a-service provider via Amazon Web Services. Consumers have embraced this disruption, driving change across the industry as traditional retailers have invested heavily in technology 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. We believe this will result in economic returns well above 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.

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 an Uncertainty Rating of Medium. Amazon must protect its leading online retailing position, which can be challenging as consumer preferences change, especially after 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 non-traditional areas, such as producing content for Prime Video and building its 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 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 investing in growth opportunities and drive the 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 due to inferior logistics 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 at larger retailers.

This article was compiled by James Ubi.