We are raising our fair value estimate for wide-moat Amazon to $195 per share from $193 after the company reported solid second-quarter results.
• Fair Value Estimate: $195
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High
What We Thought of Amazon’s Earnings
The company’s third-quarter outlook aligned with our revenue estimate and was better than our operating income estimate. Changes to our model are modest but centre on continued profitability enhancements in the near term. Amazon continues to take strides in efficiency improvements throughout the network, which helps lower costs and improve delivery speeds and ultimately drives increased purchases by prime members. After a pullback that began in early July, we see shares as increasingly attractive.
AWS Ahead of Our Model
Overall demand trends remain unchanged over the last year or so, with e-commerce showing signs of consumer stress. Second-quarter revenue grew 10% year-over-year as reported, or 11% in constant currency, to $148.0 billion, compared with the guidance mid-point of $146.5 billion. Relative to our estimates, online stores and third-party seller services drove most of the miss, while all segments were slightly light. Amazon Web Services was nicely ahead of our model. The two key segments for long-term growth, AWS and advertising, increased 19% and 20% year over year, as reported, respectively. Amazon’s advertising growth continues to outpace its large internet peers, while AWS’ growth accelerated sequentially for the fourth straight quarter.
Margins have been consistently stronger than anticipated over the past year, and we continue to believe there is room for expansion as the multihub strategy continues to unlock efficiencies. Second-quarter profitability was impressive, with operating profit at $14.7 billion, compared with the high end of guidance at $14.0 billion. This resulted in an operating margin of 9.9%, compared with 5.7% a year ago. The international unit generated positive operating profits for the second straight quarter, which we think is a harbinger for longer-term expansion.
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