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Stock Analyst Update

Amazon Provides Constructive Outlook; FVE Up to $4,200

We are again impressed by Amazon's earnings power as COVID-19 costs roll away.

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Wide-moat Amazon (AMZN) continued its string of impressive results in the first quarter, with revenue and operating profit both topping the high end of guidance. Guidance for the second quarter is better than FactSet consensus, while operating profit is within the range. Amazon remains well positioned to prosper from the shift toward e-commerce during the COVID-19 pandemic (with particular strength in groceries and staples) in the near term, but also the secular shift toward e-commerce in the long term. We think results show the company can sustain strength even as the lockdowns ease, as management sees no slowdown in demand. We are again impressed by Amazon’s earnings power as COVID-19 costs roll away and the company grows into its 50% fulfilment capacity expansion from 2020. We raise our fair value estimate to $4,200 per share from $4,000 based on results and guidance.

First-quarter revenue grew 44% (41% in constant currency) year over year to $108.5 billion, compared with FactSet consensus of $104.5 billion and guidance of $100 billion-$106 billion. Physical stores, which declined 16% year over year, were unsurprisingly the lone soft spot. The brightest area was other revenue, which includes advertising and grew 77% year over year, ahead of our model. We think advertising remains a very attractive option for marketers looking to access a vast audience. Relative to the first quarter in 2020, AWS grew 32% to $13.5 billion, thanks to robust cloud adoption. Online stores grew 44% to $52.9 billion, with groceries performing well per management. Third party grew 64% year over year, while subscription grew 36%.

Operating margin was 8.2%, compared with 5.3% a year ago and 4.6% at the midpoint of guidance. This includes $4 billion of COVID-19-related costs, while Amazon also opened additional data center capacity, which capped margins. We remain impressed by Amazon’s margin performance and we expect strength to continue as COVID-19-related costs unwind throughout the year.

 

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