Going Into Earnings, Is Amazon Stock a Buy, a Sell, or Fairly Valued? (2024)

Amazon.com AMZN is set to release its fourth-quarter earnings report on Feb. 01, 2024, after the close of trading. Here’s Morningstar’s take on Amazon’s earnings and the outlook for its stock.

Key Morningstar Metrics for Amazon

• Fair Value Estimate: $155.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Exemplary

What to Watch for In Amazon’s Q4 Earnings

• Amazon Web Services growth: This seemed like it bottomed last quarter and started to improve. Similar trends were seen at Microsoft MSFT for Azure. We’re expecting a good performance here.
• Advertising growth: Advertising has been a bright spot, and we expect it to remain robust. We will be watching for relative growth versus Alphabet GOOGL and Meta Platforms META.
• E-commerce in general: We will be interested in consumer behavior (trading down, more staples, etc.) to get signals as to what other companies might be looking for in the broader macro environment in the first half of 2024.
• Profitability: A year’s worth of restructuring has already started to bear fruit, as profitability was strong in the third quarter. We’re expecting more of the same for the fourth.
• Earnings outlook: Amazon guides one quarter at a time, and only on the revenue and operating profit lines. We’re expecting guidance to be mostly in line for revenue and a little better for profitability.

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.

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-19 pulled forward some demand by changing consumer behavior and better penetrating some retail categories that had not previously gained as much traction online, such as groceries, pharmacy, and luxury goods. We think Prime subscriptions and their accompanying benefits, combined with selection, price, and convenience, continue to drive the retail story. We also see international as a longer-term opportunity within retail. We model total retail-related revenue growing at a 9% compound annual growth rate, or CAGR, over the next five years.

We believe the critical growth drivers over the medium term will be AWS and advertising. Since these segments earn materially higher margins than the rest of the business, we also expect them to drive margins higher over time. Over the next five years, we project AWS revenue growing at a 15% CAGR and advertising revenue growing at a 19% CAGR. In total, Amazon should grow at an 11% CAGR through 2027. We model GAAP operating margin expanding from 2% (actual) in 2022 to the low double digits in 2027 as the company grows into its expanded footprint and optimizes its substantial investment in transportation.

Read more about Amazon’s fair value estimate.

Economic Moat Rating

We assign Amazon a wide moat based on network effects, cost advantages, intangible assets, and switching costs. The firm has been disrupting the traditional retail industry for more than two decades while emerging as the leading infrastructure-as-a-service provider via AWS. Consumers have embraced this disruption, which has driven change across the entire industry, as traditional retailers have invested heavily in technology to keep pace. COVID-19 has accelerated this change. 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 over its cost of capital for years to come.

We believe Amazon’s retail business enjoys a wide moat supported by cost advantages, intangible assets, and network effects, based on a combination of online stores, third-party seller services, subscription services, and physical stores. Given its massive scale, Amazon has created cost advantages, including buying power, economies of scope, route density, and research and development. From a total gross merchandise value perspective, with approximately $580 billion in 2021, it finally surpassed Walmart WMT. Additionally, the company has become more vertically integrated over time, and most recently has built out its transportation network. Size dictates certain scales of efficiency, but we think Amazon is the definition of operational excellence.

Read more about Amazon’s moat rating.

Risk and Uncertainty

We believe Amazon sees a high amount of uncertainty, and that despite being an e-commerce leader, it faces a variety of risks.

Amazon must protect its leading online retail position, which can be challenging as consumer preferences change (especially since the COVID-19 pandemic, as they 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 transportation network.

Similarly, the company must 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 investment areas. These decisions require capital allocation and management focus, and they may play out over years rather than quarters.

Read more about Amazon’s risk and uncertainty.

AMZN Bulls Say

• Amazon is the clear leader in e-commerce, and it enjoys an unrivaled scale 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. Furthermore, 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, due to inferior logistic networks.
• Amazon may not be as successful in penetrating new retail categories like luxury goods, due to consumer preferences and an improved e-commerce experience from larger retailers.

This article was compiled by Frank Lee.