Morningstar

Pullback in Amazon Shares Creates Buying Opportunity

Concerns over profitability in the fourth quarter are overblown, creating a possible entry point for the wide-moat retailer, writes Morningstar’s R.J. Hottovy.

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Amazon.com Inc
(AMZN)

The big question from

However, we remain confident that the network effect underpinning our wide moat rating is intact and we believe the market is overreacting. Regarding fourth-quarter trends, we buy management's assertion that tremendous Fulfillment by Amazon usage by third-party sellers--a claim backed by our conversations with Amazon fulfillment center representatives--put a strain on fulfillment center capacity and required additional costs. While this probably means Amazon will invest in additional fulfillment capacity, we view these investments as crucial in maintaining the vibrancy of Amazon's third-party seller community while driving Prime member adoption, which is critical to our longer-term margin assumptions.

We don't plan material changes to our $700 fair value estimate, as we view the extra capacity as incremental and not the start of a major investment cycle. The capacity investments will push back our previous five-year GAAP operating income target of 6.5% by a year, but the free cash flow impact will be offset by a modest increase in our top-line outlook across each segment. We view today's pullback as an attractive opportunity for one of the widest moats in the consumer space today.

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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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