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Stock Analyst Update

Amazon E-Commerce Growth Slows; FVE Steady at $4,200

Wide-moat Amazon AMZN reported second-quarter results that were within its guidance range but were slightly short of investor expectations for both revenue and operating profit.

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Wide-moat Amazon (AMZN) reported second-quarter results that were within its guidance range but were slightly short of investor expectations for both revenue and operating profit. Guidance for the third quarter is also light compared with FactSet consensus. In short, consumers' online shopping levels are returning to more normal levels as they shift some spending to other entertainment sources and offline shopping. Meanwhile, the company continues to add capacity at a breakneck pace in order to meet customer demand and one day delivery, even as it roughly doubled its footprint during the last 18 months. We see no cracks in the long-term story as Amazon remains well positioned to prosper from the secular shift toward e-commerce and the public cloud over the next decade. We note revenue weakness was limited to Amazon’s own online store segment, with other segments performing well and overall profitability impressive despite lower revenue. Our model changes are fairly modest, thus we are maintaining our $4,200 per share fair value estimate and see shares as undervalued.

Second-quarter revenue grew 27% (24% in constant currency) year over year to $113.1 billion, compared with FactSet consensus of $115.3 billion and guidance of $110 billion to $116 billion. Meteoric growth in online stores from the last four quarters slowed to a more pedestrian 16% year-over-year increase while physical stores recovered from a year of declining revenue and grew 11% year over year. Still, third party seller services grew 38% year over year despite a marked slowdown, as the solution remains attractive to merchants. Subscription services, AWS, and other remained strong, with year-over-year growth of 32%, 37%, and 88%, respectively. We continue to view advertising (in “other”) and AWS as key long-term growth drivers for the firm. In particular we see AWS as the clear leader in public cloud and we think Amazon’s advertising business offers a unique value proposition for marketers.

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