Amazon Earnings: Impressive Retail Profitability and AWS Growth Drive Fair Value Upgrade

Fair value estimate for the stock raised to US$185 after strong fourth quarter.

Dan Romanoff, CPA 2 February, 2024 | 10:39AM
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Key Morningstar Metrics for Amazon

  • Fair Value Estimate: US$185.00
  • Morningstar Rating: 3 stars
  • Morningstar Economic Moat Rating: Wide
  • Morningstar Uncertainty Rating: High

What We Thought of Amazon’s Earnings

Wide-moat Amazon AMZN reported strong fourth-quarter results and offered a mixed outlook relative to our expectations, including in-line revenue and better profitability. Improvements in fulfillment and cost to serve continue to drive stronger-than-anticipated profitability in retail. Segment results were good overall, with advertising coming in the strongest relative to our model. After several quarters of strong performance on the profitability front, we are raising our operating margin outlook by 160 basis points for 2024 and similar margin expansion over the next several years. In turn, we raise our fair value estimate to US$185 from $155. After a strong run in the shares over the last year, we see the stock as fairly valued.

We continue to see positive developments on the demand front on multiple vectors. Fourth-quarter revenue accelerated to 14% year-over-year growth as reported and 13% in constant currency, and came in at $170.0 billion, compared with the high end of guidance at $167.0 billion. The two key segments, Amazon Web Services, or AWS, and advertising, grew 13% and 27% as reported, respectively, over the year-ago period. Amazon’s advertising growth continues to outpace that of its large internet peers, albeit off of a smaller revenue base. Relative to our model, online stores, third-party seller services, or 3P, and advertising drove the vast majority of upside, consistent with the last quarter. Subscription services were ahead, AWS and other were in line, and physical stores were slightly shy of our assumptions.

Margins were good across segments, and we continue to believe there is room for further improvements. Profitability was impressive, with operating profit coming in at $13.2 billion, compared with the high end of guidance at $12.0 billion, resulting in an operating margin of 7.8%, compared with 1.8% a year ago, and representing the best fourth quarter in at least a decade.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating Inc182.81 USD-0.68Rating

About Author

Dan Romanoff, CPA  Dan Romanoff, CPA, is an equity research analyst on the technology, media, and telecommunications team for Morningstar.

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