Amazon's Profitability Hit by Inflation, Excess Capacity; Guidance Doesn't Help; FVE Down to $3,850

We are lowering our fair value estimate to $3,850 per share, from $4,100, for wide-moat Amazon after it reported a mixed quarter and issued worse than expected guidance for the second quarter. The highlight of results was strength in AWS, which continues to benefit from the ongoing shift of enterprise workloads to the cloud. While revenue was ahead of the guidance midpoint, first-party sales suffered its second straight quarter of year-over-year contraction, which we believe is a first but is not a surprise. Operating margin was a concern, as inflation, excess labor, and excess capacity ate into profitability, which came in just above the low end of guidance and was well short of our expectations. Meanwhile, second-quarter guidance is well short of our model, as we think profitability challenges will linger for a couple of quarters and perhaps into next year; Prime Day will move into the third quarter, and demand levels have not yet normalized post-COVID-19. While we expect the second half of the year to show improvements, we modestly lowered our growth and profitability estimates, particularly in the near term, to account for guidance and heightened uncertainty.