Amazon: Stock of the Week

Move over Meta and Google, Amazon’s got the fastest ad growth – and just try to compete on AWS.

Andrew Willis 15 May, 2023 | 4:18AM
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Andrew Willis: Amazon (AMZN) posted strong second-quarter results, but it wasn’t because they shipped out more packages…

Online retail at Amazon was flat in terms of growth on a year-over-year basis, compared to overall revenue growth for the company at 9%. But as senior equity analyst Dan Romanoff points out, its two most critical businesses are instead now in Amazon Web Services and advertising - two key components of a wider ecosystem that Amazon investors should keep in mind.

Rather than relying on relatively cyclical sectors like retail, AWS profits from regular business workloads and is enterprise-facing rather than consumer-facing, as companies upload their workloads to the cloud.  Amazon has established a wide moat in the space with its scale and features, and we see competitors struggling to compete with AWS in any meaningful way.

But dominance in cloud computing can’t last forever without continued investment in new offerings and management focus. We did see a deceleration in AWS growth, although it still hit 16% year over year last quarter. Meanwhile, on the consumer-facing front, Amazon’s advertising revenue surged past both Meta and Google parent Alphabet at 21% growth year over year.  It’s a large business worth watching and continues to scale, offering proprietary data points for a vast audience.

Amazon’s businesses, some large, some massive, some stagnant and others still growing fast, all have their own competitive advantages. But the ecosystem they form is greater than the sum of its parts – something to think about next time you ask Alexa.  

For Morningstar, I’m Andrew Willis.

 

bulls 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.

bears 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 U.S. 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.

 

Editor's Note: All images are courtesy of Unsplash.com and APImages. 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Amazon.com Inc180.75 USD-0.17Rating

About Author

Andrew Willis

Andrew Willis  is Senior Editor at Morningstar Canada. He previously produced content for Fidelity Investments and finance industry events for Euromoney Institutional Investor and has written in the past for Thomson Reuters and CNN. Follow him on Twitter @Andrew_M_Willis.

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