Key Morningstar Metrics for Amazon
- Fair Value Estimate: $240
- Morningstar Rating: 2 stars
- Morningstar Economic Moat Rating: Wide
- Morningstar Uncertainty Rating: Medium
What We Thought of Amazon’s Earnings
We are raising our fair value estimate for wide-moat Amazon AMZN to $240 per share from $200 after the company reported strong fourth-quarter results. The firm’s first-quarter outlook was slightly better than we expected, despite including more than $2 billion of incremental currency pressure on revenue. Additionally, given the early returns on the profitability front from the ongoing network improvement efforts, we modestly raised our profitability and working capital assumptions throughout our forecast period, which had a substantial impact on our valuation. When operating margins are relatively modest, even small improvements are meaningful. We see shares as fairly valued, after a strong run since early August.
Retail demand trends have remained stable the last seven quarters, with e-commerce performing reasonably well but still showing signs of consumer stress. Fourth-quarter revenue grew 10% year over year, as reported to $187.8 billion, compared with the top end of guidance at $188.5 billion. Currency was a $700 million greater headwind than anticipated. Relative to our estimates, online stores, physical stores, and AWS performed best, while third party seller services and advertising were slightly light. The two key segments for long-term growth, AWS and advertising, expanded 19% and 18% year over year, respectively, as reported. Amazon’s advertising growth continues to perform inline with or better than large internet peers, while AWS’s growth was strong and like Azure, is capacity constrained, so investment will surge further in 2025.
Margins have been consistently stronger than anticipated over the past couple years, and we think there is room for expansion as the multi-hub strategy and increased use of robotics continue to unlock efficiencies. Fourth-quarter profitability was impressive, with operating profit at $21.2 billion, compared with the high end of guidance at $20.0 billion. This resulted in an operating margin of 11.3%, compared with 7.8% a year ago.
Amazon.com Stock vs. Morningstar Fair Value Estimate
Source: Morningstar Direct. Latest price as of 5:00 ET.
What’s the Outlook for Amazon’s First Quarter?
Guidance for the first quarter is inline with our expectations after normalizing for a few factors, even as the revenue guidance includes $2.1 billion of new currency headwinds along with a $1.5 billion negative impact to account for leap year in the first quarter a year ago. Further, on the profitability front, several changes were made to the accounting estimates for the useful lives for servers and certain mechanical equipment, which are expected to result in a net hit of $400 million. Without these impacts, our first-quarter estimates for both revenue and operating profit would have been squarely within the guidance ranges, skewing towards the low end. The outlook is consistent with our longer-term thinking of gradually decelerating revenue and gradually ramping margins. We also observe that FactSet consensus estimates were more aggressive than our model.
Amazon’s first-quarter outlook includes revenue of $151.0 billion to $155.5 billion and operating income of $14.0 billion to $18.0 billion. Capital expenditures are expected to be in the vicinity of $100 billion for the year, which is well above our expectations. We also made some working capital adjustments within our 10-year forecast to account for increasingly streamlined operations. We see a path to continuous margin improvement over time, even if these gains do not come in a linear fashion.
On the retail side, Amazon continues to target the overall customer experience by expanding its selection, offering lower prices, and improving delivery speed. These factors continue to drive order frequency and ticket sizes for prime members. We see continued expansion of the same delivery as a margin lever, and we look forward to seeing more about how robotics and automation are lowering costs in the company’s brand-new facility in Shreveport, Louisiana. The company is using Shreveport as a template for new facilities and even for retrofitting existing buildings. Management noted that consumers continue to focus more on everyday items, trade down, and seek deals while eschewing larger ticket discretionary items. Paid unit growth was 11% year over year, supporting the consumer trade-down narrative. This is unsurprising and still represents the underpinnings of our near-term estimates. From a retail sales perspective, revenue from online stores increased 7%, physical stores increased 8%, third party increased 9%, and subscription services increased 10% (all year over year, as reported).
AWS is clearly benefiting from a shift back to porting new workloads to the cloud and the generative AI boom. We think these trends are consistent with our expectation that AWS is an overall key long-term driver for Amazon. Management noted a multibillion book of business from generative AI already that is growing revenue in the triple digits and growing three times faster than AWS was in its infancy. Management also confirmed that AWS is capacity-constrained for generative AI usage. We think each of these trends is directionally similar to Microsoft’s Azure business, and that AWS is set up well for durable growth over the next couple of years. Fourth-quarter AWS revenue grew 19% year over year to $28.8 billion, compared with 19% growth in each of the previous two quarters and 13% a year ago.
Amazon and Generative AI
We believe Amazon is well-positioned in generative-AI and should benefit as the technology adoption gains steam. We think the company’s proprietary chips, Trainium and Inferentia, and Bedrock, SageMaker, and other services support this notion. Management believes generative-AI can add tens of billions of dollars to revenue over the next several years. On AWS overall, we think the migration to the public cloud is an enormous opportunity and remains in the early stages of evolution, with AWS being the clear leader. Based on strong AI demand, Amazon plans to increase capital investments in data center capacity in 2025, to the tune of approximately $100 billion, which is well above the $75 billion we previously had modelled.
Amazon’s profitability improvements have been impressive, and we continue to think additional enhancements are likely. This is notable as we have been underestimating the company’s productivity and profitability enhancements for more than a year now. In retail, the regional hub model has yielded both cost savings and improved delivery speeds. Management continues to methodically ratchet up efficiencies throughout the network, most recently on inbound improvements and the opening of a next-gen automated facility with increased use of robotics. Strength in high-margin businesses AWS also continues to bolster profitability.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
