Morningstar

Amazon’s Heavy Investment Activity Justified

The firm may be spending heavily, but strong grown and consumer engagement trends show these dollars are being well spent, writes Morningstar’s R.J. Hottovy.

Securities In This Article
Amazon.com Inc
(AMZN)

In what might become a recurring narrative for 2017,

The efficacy of these investments is dictated by their returns, and we'd be more concerned if Amazon hadn't retained its strong top-line growth (22.6%) as well as other metrics reaffirming the strength of the network effect underpinning our wide moat rating. These include a 52% increase in retail subscription services (mostly Prime membership fees, but also audio/video content and other subscriptions), a 36% increase in third-party seller service revenue, and a 58% increase in other revenue (suggesting healthy advertising revenue growth, which we view as an emergent long-term cash flow contributor), not to mention the rash of store closures across the U.S. retail industry.

Although first-quarter results were a shade below our expectations, we're planning a mid-single-digit percentage increase in our $950 fair value estimate based on increased optimism over AWS growth trajectory (including 30%-plus average annual revenue growth the next five years), Prime adoption in international markets, stable third-party vendor participation, nascent opportunities like Echo/Alexa and advertising, and U.S. tax reform adjustments.

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About the Author

R.J. Hottovy

Sector Strategist
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R.J. Hottovy, CFA, is a consumer strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He is responsible for consumer discretionary and staples research. He has covered the consumer sector as an analyst and director of global consumer equity research for Morningstar since joining the company in 2008, and specializes in a broad range of consumer categories including restaurants, footwear and apparel retailers, consumer electronics retailers, fitness clubs, home improvement and furnishing retailers, and consumer product manufacturers.

Before joining Morningstar, Hottovy was a director and senior stock analyst for Next Generation Equity and an analyst for William Blair & Co., specializing in a wide range of retail and consumer product companies. He also spent two years at Deutsche Bank, covering waste management, water utilities, and equipment rental stocks.

Hottovy holds a bachelor’s degree in finance and a second degree in computer applications from the University of Notre Dame, where he graduated magna cum laude. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Institute and the CFA Society of Chicago.

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