After Earnings, Is Amazon Stock a Buy, a Sell, or Fairly Valued?

Amazon released its fiscal second-quarter earnings report on July 30. Here’s Morningstar’s take on Amazon’s earnings and stock.

Key Morningstar Metrics for Amazon

• Fair Value Estimate
  : USD 300.00
• Morningstar Rating
  : ★★★
• Morningstar Economic Moat Rating
  : Wide
• Morningstar Uncertainty Rating
  : Medium

What We Thought of Amazon’s Q2 Earnings

Amazon reported second-quarter results that beat the high end of guidance on both the top and bottom lines. Revenue increased 20% year over year in constant currency to USD 200.6 billion, while operating margin was 13.7% versus 11.4% a year ago.

Why it matters: Overall results are good, as consumer spending remains stable, Prime Day was a success, the expansion of grocery and same-day delivery continues to drive demand, and artificial intelligence supports surging AWS growth. Further, profitability is impressive against various margin headwinds.

• All segments were ahead of our model, with physical stores slightly light, just like last quarter. Online stores, third-party seller services, and AWS were each more than USD 1 billion above expectations. We do not see any areas of concern with demand and believe the results support our positive long-term view on Amazon.
• Operating income was USD 27.5 billion with a margin of 13.7%, compared with the high end of guidance at USD 24.0 billion. Ramping up Leo costs, tariffs, massive data center expansion, and conflicts in Ukraine and the Middle East could have hampered results, but did not have a meaningful impact.

The bottom line: We raise our fair value estimate for wide-moat Amazon to USD 300 from USD 280 previously. Good results were matched by solid guidance, which drove increases in our estimates, particularly for AWS and advertising. Even with a pop in after-hours trading, we still see shares as attractive.

• AWS was strong, with growth accelerating sharply to 37% year over year, the fastest growth printed in 18 quarters, which is astounding given the unit’s scale. The surging demand spans both traditional and AI workloads and clearly supports management’s massive capital investment plans.

Coming up: The outlook for third-quarter revenue and profitability bracketed our estimates. The midpoint of guidance calls for revenue of USD 199.5 billion and operating profit of USD 24.5 billion.

The following are excerpts from Morningstar’s company report on Amazon.

Fair Value Estimate for Amazon

Our long-term fair value estimate of USD 300 per share implies a 2026 enterprise value/sales multiple of 4 times and a negative 1% free cash flow yield. We note that the free cash flow yield is constrained by the significant AWS capacity expansion underway. We believe the critical growth drivers over the medium term will be AWS and advertising. In total, Amazon should grow at a 13% CAGR through 2030. We model GAAP operating margin expanding from 11% (actual) in 2025 to approximately 14% in 2030 as the company grows into its expanded footprint and optimizes its substantial investment in delivery.

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. We assign wide moats to Amazon’s retail and advertising businesses, as well as AWS. Amazon has been disrupting the traditional retail industry for more than 25 years, while also emerging as the leading public cloud service provider via Amazon Web Services. We think many of these areas reinforce one another and see little difficulty in Amazon continuing to deliver returns on invested capital well in excess of its cost of capital over the long term.

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 this current investment cycle eases, we see a return to more normal cash flow generation levels.

Given that the company is still in a phase of rapid growth and heavy investment, we do not expect it to pay dividends or repurchase shares. The company is acquisitive, but given its size, we characterize all acquisitions throughout its history as tuck-in, including the largest deal of USD 14 billion for Whole Foods in 2017 and the USD 8 billion MGM deal in 2022. We expect the focus to remain on growth, including heavy investment for AWS and delivery.

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. 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 investing 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 years rather than quarters. Continued international expansion will likely require similar investment and management attention but will also increase exposure to different regulatory environments.

From an environmental, social, and governance perspective, data breaches and service outages are a concern for any cloud service provider.

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 investing 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, high-margin revenue.

AMZN Bears Say

• Regulatory concerns are rising for large technology firms, including Amazon. 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. AWS investments for AI have been substantial and are likely to remain elevated for several years.
• 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. The same applies to international expansion.

This article was compiled by Irza Waraich.