We are lowering our fair value estimate for wide-moat Amazon (AMZN) to $4,100 per share from $4,200, based mainly on margin pressures arising from hiring and shipping challenges, which we think may pressure profitability in the near term and, to a lesser extent, the long term. That said, we see shares as attractive. Amazon reported third-quarter results that came in above the midpoints of its guidance range for both revenue and operating income but were still shy of investor expectations. Guidance for the fourth quarter was modestly below our expectations but has little bearing on our long-term view. Meanwhile, the company continues to rapidly add capacity in order to meet customer demand and one day delivery, even as it roughly doubled its footprint during the past two years. We don’t see issues with 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, but we do see a modest reset in terms of growth and profitability through the next several quarters.
Third-quarter revenue grew 15% (15% in constant currency) year over year to $110.8 billion, compared with FactSet consensus of $111.6 billion and guidance of $106 billion to $112 billion. Surging growth last year in online stores and third-party seller services slowed to 3% and 19% year over year gains in the third quarter, respectively, while physical stores accelerated to 13% growth. This shift succinctly captures the dynamics of the end of COVID-driven lockdowns. On a year over year basis, subscription services slowed to 24% growth, AWS accelerated to 39% growth, and other decelerated to 50% growth. Performance of AWS was staggering with acceleration from a $12 billion base a year ago. We continue to view advertising (in “other”) and AWS as key long-term growth drivers for the firm.
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