Morningstar

Amazon's Network Effect Strengthens; Shares Undervalued

We're planning a modest increase to our $1,200 fair estimate and view shares as undervalued today.

Securities In This Article
Amazon.com Inc
(AMZN)

Unpacking each of these trends, we believe that 2017 will go down as a pivotal year for Amazon Prime memberships, where the company's focus in North America shifted from Prime enrollment to engagement and many international markets seeing a Prime recruitment ramp similar to the U.S. in 2012-13. This is evident in the 59% increase in subscription services (versus 53% currency-neutral growth last quarter), with Prime Day helping to drive U.S. members into new services and a record day for Prime trials globally. Not surprising, this recruitment/engagement is also helping to drive third-party seller activity, where revenue growth remained robust at 40%. AWS posted health currency-neutral revenue growth of 42% and segment margins of 25.5%, which we attribute to adoption of mission critical services and AWS Marketplace contract term changes.

For 2017, we now forecast top-line growth of 30% but also a modest reduction in operating margins to 2.2% (versus 3.1% a year ago), which is consistent with management's fourth quarter guidance for revenue between $56 billion-$60.5 billion and operating income between $300 million-$1.65 billion. Over the next five years, we now expect average annual revenue growth of 24% (up from 22% due to new category expansion like apparel, home furnishings, and pharma) and operating margins of 6%. As such, we're planning a modest increase to our $1,200 fair estimate and view shares as undervalued.

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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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