Amazon(AMZN)released its fourth-quarter earnings report on February 1. Here’s Morningstar’s take on Amazon’s earnings and stock.
Amazon’s results were better than we expected. We raised our margin assumptions based on continued strong results over the last several quarters and the guidance for the first quarter of 2024, so we assume there is a little more upside over the long term. Overall results are consistent with our long-term thesis for AWS, advertising, and e-commerce leadership, along with our wide moat rating.
Shares have run sharply, so we see the stock as fairly valued. We see tension between the good results and a mixed macro picture, and we are not willing to assume conditions are rosy enough for enterprises to aggressively expand workloads on AWS and consumers to happily spend on discretionary items in the near term.
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 due to inferior logistic networks.
Amazon may not be as successful in penetrating new retail categories like luxury goods due to consumer preferences and an improved e-commerce experience from larger retailers
Is Amazon Fairly Valued?
With its 3-star rating, we believe Amazon’s stock is fairly valued compared with our long-term fair value estimate.
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 some retail categories that had not previously gained as much traction online, such as groceries, pharmacy, and luxury goods. We think Prime subscriptions and their 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 a 9% compound annual growth rate, or CAGR, over the next five years.
We believe the critical growth drivers over the medium term will be AWS and advertising. Since these segments earn materially higher margins than the rest of the business, we also expect them to drive margins higher over time. Over the next five years, we project AWS revenue growing at a 15% CAGR and advertising revenue growing at a 19% CAGR. In total, Amazon should grow at an 11% CAGR through 2027. We model GAAP operating margin expanding from 2% (actual) in 2022 to the low double digits in 2027 as the company grows into its expanded footprint and optimizes its substantial investment in transportation.
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