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Raising Amazon’s Fair Value After Transformational 2017

Several emerging cash-flow drives like advertising and third-party seller services are contributing to the bottom line sooner than we had expected.

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Amazon.com Inc
(AMZN)

Our key takeaway from wide-moat

We're planning to raise our fair value estimate from $1,250 per share to $1,600, with $75 of the increase attributed to time value of money, $100 due to a lower effective tax rate, and the remainder from more optimistic five-year revenue growth and margins estimates stemming from the aforementioned emergent cash flow drivers. Our model now assumes 21% average annual revenue growth from 2018 to 2022, including 26% growth from third-party seller services, 34% from retail subscription services, 38% from AWS, and 43% from other sources. While Amazon's growth will still require fulfillment, technology, and content investments, we see a path to 6% margins over the next five years (compared with 2.3% in 2017). Even after the post-fourth-quarter rally, we view shares as undervalued.

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About the Author

R.J. Hottovy

Sector Strategist
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R.J. Hottovy, CFA, is a consumer strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He is responsible for consumer discretionary and staples research. He has covered the consumer sector as an analyst and director of global consumer equity research for Morningstar since joining the company in 2008, and specializes in a broad range of consumer categories including restaurants, footwear and apparel retailers, consumer electronics retailers, fitness clubs, home improvement and furnishing retailers, and consumer product manufacturers.

Before joining Morningstar, Hottovy was a director and senior stock analyst for Next Generation Equity and an analyst for William Blair & Co., specializing in a wide range of retail and consumer product companies. He also spent two years at Deutsche Bank, covering waste management, water utilities, and equipment rental stocks.

Hottovy holds a bachelor’s degree in finance and a second degree in computer applications from the University of Notre Dame, where he graduated magna cum laude. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Institute and the CFA Society of Chicago.

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