Morningstar | Advertising, AWS, Prime Engagement, and Third-Party Sales Reinforcing Amazon's Cash Flow Potential
Even the most ardent Amazon bear would have a hard time finding negatives from its second-quarter update, as Amazon Web Services, advertising services, third-party sales, and Prime memberships are each contributing to an increasingly visible long-term cash flow story.AWS is getting a lot of attention, with revenue growth accelerating for the third straight quarter to 48.9% and segment margins improving 460 basis points to 26.9% due to operating leverage from strong customer usage rates. However, we believe it's North American retail operations that should have investors' attention, as its network effect--the primary source behind our wide moat rating--is starting to manifest in more stable profitability. As in previous quarters, we think advertising services are among the primary reasons Amazon continues to come in above its quarterly operating profit goals ($3.0 billion this quarter--5.6% of sales--versus guidance of $1.1 billion-$1.9 billion), reinforcing its importance as a distribution platform for sellers, which should continue over the foreseeable future. We also think third-party sales and increased Prime member engagement are contributing to the margin upswing, which should persist through new logistics options for sellers while Prime members take advantage of new benefits like Whole Foods and Amazon Music, which have positive member pricing implications.
With greater visibility for some of Amazon's highest-margin categories, we now think 8% operating margins are achievable over the next five years (assuming top-line growth in the low to mid-20s) and plan to raise our fair value estimate to $2,200 from $1,900. While Amazon's third quarter typically carries the greatest downside risk due to fulfillment center investments ahead of the holiday season, we think advertising, AWS, and other contributors should mitigate this risk and make third-quarter targets ($54.0 billion-$57.5 billion in revenue, $1.4 billion-$2.4 billion in operating income) achievable.
Amazon.com serves consumers through its online and physical stores. The company also manufactures and sells electronic devices, including Kindle, Fire tablet, Fire TV, Echo, and Ring, and the company develops and produces media content. The company operates customer service centers and provides programs that enable sellers to grow their businesses, sell their products in its stores, and fulfill orders through the company The company serves developers and enterprises of various sizes, including start-ups, government agencies, and academic institutions, through its Amazon Web Services segment, which provides a set of global compute, storage, database, and other service offerings. The company also provides services, such as advertising.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
We have operations in 27 countries.
Unfortunately, this report is not available for the investor type or country you selected.
Browse all ResearchPool reportsReport is subscription only.
Thank you, your report is ready.
Thank you, your report is ready.