Amazon Hit by Inflation; FVE Down to $3,850
We are lowering our fair value estimate to $3,850 per share from $4,100, for wide-moat Amazon after it reported a mixed quarter and issued worse than expected guidance for the second quarter.
We are lowering our fair value estimate to $3,850 per share from $4,100, for wide-moat Amazon (AMZN) after it reported a mixed quarter and issued worse than expected guidance for the second quarter. The highlight of results was strength in AWS, which continues to benefit from the ongoing shift of enterprise workloads to the cloud. While revenue was ahead of the guidance midpoint, first-party sales suffered its second straight quarter of year-over-year contraction, which we believe is a first but is not a surprise. Operating margin was a concern, as inflation, excess labor, and excess capacity ate into profitability, which came in just above the low end of guidance and was well short of our expectations. Meanwhile, second-quarter guidance is well short of our model, as we think profitability challenges will linger for a couple of quarters and perhaps into next year; Prime Day will move into the third quarter, and demand levels have not yet normalized post-COVID-19. While we expect the second half of the year to show improvements, we modestly lowered our growth and profitability estimates, particularly in the near term, to account for guidance and heightened uncertainty.
First-quarter revenue grew 7% (8% in constant currency) year over year to $116.4 billion, compared with guidance of $112 billion to $117 billion. Pandemic-fueled growth last year in online stores and third-party seller services continued to slow to a 3% decline and 7% growth year over year in the quarter, respectively, while physical stores continue to benefit from consumers leaving their homes to shop and grew by 17% year over year. Unit growth was flat, but we view this as a mix issue as shopping habits normalize. Amazon noted no consumer slowdown as macro factors such as inflation and the Russian invasion loom large. Compared with the year-ago period, subscription services slowed to 11% growth, AWS posted strong 37% growth, and advertising decelerated to 23% growth.
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Dan Romanoff does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.