Skip to Content
Stock Analyst Update

Acceleration Across Amazon's Services Portfolio

The natural question investors might be asking is how much of wide-moat Amazon's recent momentum is tied to pandemic demand and how much reflects structural changes?

Mentioned:

Posting another quarter of exceptional growth (revenue of $96.2 billion, up 37.4%, versus guidance of $87-$93 billion) and profitability (operating profit of $6.2 billion, representing operating margins of 6.4%--10.0% excluding $3.5 billion in COVID-related expenses--versus guidance of $2-$5 billion), the natural question investors might be asking is how much of wide-moat Amazon's (AMZN) recent momentum is tied to pandemic demand and how much reflects structural changes? While certain trends are unlikely to repeat--pantry stuffing and fulfillment centers running at elevated capacity, for instance--many changes in consumer behavior are likely to sustain, giving us confidence in our five-year targets calling for 22% top line CAGR and 10% operating margins.

Our conviction comes from several service-related sources. One, Prime member engagement remains high, with Prime member renewal rates improving year over year and subscription revenue per Prime member increasing roughly 10% according to our estimates. Two, third-party seller services revenue also accelerated (55% from 52% last quarter), which not only indicates Amazon's importance as a distribution channel, but that sellers are increasingly using services like Fulfillment by Amazon (FBA). Three, as advertising budgets rebound from COVID lows, we expect Amazon will become an increasingly important partner both on and off Amazon marketplaces. Four, while demand remains mixed among some customers in discretionary categories, AWS margins (up 530 basis points to 30.5%) reinforces our views existing AWS users are graduating to more value-add services. Lastly, while the firm noted international profitability is "running ahead of schedule" because of fulfillment capacity usage, we still see a path to mid-single-digit operating margins for many markets outside the U.S.

We're planning to raise our $3,500 fair value estimate by a few percentage points to account for this quarter's upside and see shares as modestly undervalued.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.

R.J. Hottovy does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.