Amazon AMZN is estimated to release its fourth-quarter earnings report on Feb. 6. Here’s Morningstar’s take on what to look for in Amazon’s earnings and stock.
Key Morningstar Metrics for Amazon
• Fair Value Estimate: $200.00• Morningstar Rating: ★★
• Economic Moat: Wide
• Morningstar Uncertainty Rating: Medium
Estimated Earnings Release Date
• Thursday, Feb. 6, 2025What to Watch for in Amazon’s Q4 Earnings
• Capex levels and new capex guidance: This is in light of the surge in data center capacity expansion, and made more interesting by the Stargate announcement earlier this week.• Amazon Web Services performance: Growth should be accelerating, even if modestly. Segment margins were high last quarter. We’re also looking for any AI-related commentary on Alexa or AWS.
• Advertising performance: This is a key growth driver and margin level for the company.
• E-commerce performance: All signs point to a good quarter here.
• Discussion of margin improvements and operational performance: This has been an ongoing narrative wherein the company keeps turning the crank and finding new areas to gain efficiencies throughout the network and in other areas.
Amazon.com Stock Price
Source: Morningstar Direct.
Fair Value Estimate for Amazon
With its 3-star rating, we believe Amazon’s stock is fairly valued compared with our long-term fair value estimate of $200 per share, which implies a 2024 enterprise value/sales multiple of 3 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 pulled forward some demand by changing consumer behavior and better penetrating some retail categories, such as groceries, pharmacy, and luxury goods, that previously had not gained as much traction online.
We think Prime subscriptions and the accompanying benefits (along with selection, price, and convenience) continue to drive the retail story. We also see international as being 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.
Amazon.com Stock vs. Morningstar Fair Value Estimate
Source: Morningstar Direct.
Economic Moat Rating
We assign a wide moat rating 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 also emerging as the leading infrastructure-as-a-service provider via Amazon Web Services. This disruption has been embraced by consumers and has driven change across the entire industry, as traditional retailers have invested heavily in technology in order 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, which we believe will result in economic returns well in excess of 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, 2023, Amazon had $86.8 billion in cash and marketable securities, offset by $58.3 billion in debt. We also expect free cash flow generation—which suffered during the pandemic as the company invested heavily in facility expansion, content creation, and its transportation network—to return to normal levels over the next couple of years.
Read more about Amazon’s financial strength.
Risk and Uncertainty
We assign Amazon an Uncertainty Rating of Medium. The firm must protect its leading online retailing position, which can be challenging as consumer preferences change, especially since covid-19 (as consumers may revert to prior behaviors), and as traditional retailers bolster their online presence. Maintaining an e-commerce edge has pushed the company to invest in nontraditional areas, such as producing content for Prime Video and building its own 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.
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 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 because of inferior logistical networks.
• Amazon may not be as successful in penetrating new retail categories, such as luxury goods, because of consumer preferences and an improved e-commerce experience from larger retailers.
This article was compiled by Gautami Thombare.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
