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Amazon AMZN released its first-quarter earnings report on May 1. Here’s Morningstar’s take on Amazon’s earnings and stock.
Amazon reported first-quarter results that beat the high end of guidance on both the top and bottom lines. Revenue grew by 10% year over year in constant currency to $155.7 billion, while operating margin was 11.8% versus 10.7% a year ago. Currency hurt sales growth by $1.4 billion.
Why it matters: Results were generally good, with upside broadly on the top and bottom lines, which we think is positive in the face of looming tariffs. We see some prebuying behavior ahead of tariffs, which is worth monitoring if the tariff situation persists beyond the second quarter.
Amazon produced upside to revenue in each of segments relative to our model except for third-party sellers, which was slightly light. Consumer buying behavior has not really changed in the face of tariffs, even through April. Advertising was impressive and helped buoy overall results.While there could be some mild disappointment around solid AWS results given Azure’s very strong results on April 30, we note AWS faces the same capacity constraints and still produced upside to our estimate in the first quarter. Artificial intelligence workloads are growing in excess of 100% year over year on AWS.
The bottom line: We maintain our fair value estimate of $240 per share, as we see good results in conjunction with mixed guidance and view shares as attractive.
Coming up: Overall guidance is mixed, with revenue solid and profitability light relative to our model. Satellite launch costs for Project Kuiper will likely pressure margins for a couple quarters, while new AWS capacity coming online later this year will have a similar impact.
We do not think these will have a major impact on Amazon’s long-term profitability, but we have already been modelling relatively flat margins for 2025, so have not made meaningful changes.Considering the tariff situation, we see guidance as solid. Second-quarter guidance includes revenue of $159 billion-$164 billion, with operating income of $13.0 billion-$17.5 billion.
Amazon.com Stock Price
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Fair Value Estimate for Amazon
With its 4-star rating, we believe Amazon stock is undervalued compared with our long-term fair value estimate of $240 per share, which implies a 2025 enterprise value to sales multiple of 4 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, combined 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.
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.
We believe Amazon’s retail business has a wide moat stemming from network effects associated with its marketplace, where more buyers and sellers continually attract more buyers and sellers; a cost advantage tied to purchasing power, logistics, vertical integration (proprietary brands, owned delivery, and so on), and a negative cash conversion cycle; and intangible assets associated with technology and branding. We also believe AWS is a wide-moat business, thanks to high customer switching costs; a cost advantage associated with economies of scale where few competitors can keep up with Amazon’s investment pace; intangible assets arising from semiconductor and facility development; and a network effect associated with a marketplace for software created to make AWS work better. We also would assign Amazon’s burgeoning advertising business a narrow moat based on intangible assets from its proprietary data on hundreds of millions of users and a network effect again focusing on buyers and sellers meeting in the largest available venues. We believe that the wide moat for Amazon’s entire business is greater than the sum of its parts; we prefer to analyze Amazon’s moat on the whole, as the company’s segments reinforce one another and returns result in an unrivaled consumer experience.
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, 2024, Amazon had $101.2 billion in cash and marketable securities, offset by $52.6 billion in debt. We also expect free cash flow generation, which suffered during COVID as the company invested heavily in facility expansion, content creation, and its transportation network, to be pressured in the near-term from heavy capital expenditure investments for AWS. As this current investment cycle eases, we see a return to more normal cash flow generation levels.
Read more about Amazon’s financial strength.
Risk and Uncertainty
We assign Amazon an Uncertainty Rating of Medium. Amazon must protect its leading online retailing position, which can be challenging as consumer preferences change, especially post-covid-19 (as consumers may revert to prior behaviors), and traditional retailers bolster their online presence. Maintaining an e-commerce edge has pushed the company to make investments in nontraditional areas, such as producing content for Prime Video and building out 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.
The company must also continue to invest in new offerings. AWS, transportation, and physical stores (both Amazon branded and Whole Foods) are three notable areas of investment. These decisions require capital allocation and management focus and may play out over a period of years rather than quarters.
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 damp free cash flow growth. Also, Amazon’s penetration into some countries might be harder than in the US due to inferior logistic networks.Amazon may not be as successful in penetrating new retail categories, such as luxury goods, due to consumer preferences and an improved e-commerce experience from larger retailers.
This article was compiled by Jacqueline Walker.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.