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We’re Boosting Our Fair Value as Amazon Delivers

The wide-moat firm is clearly laying the foundation for profitable growth overseas and continuing to expand margins in the U.S., writes Morningstar’s R.J. Hottovy.

After last quarter's softer-than-expected gross margin gains, all eyes were on this important metric in

Our other key takeaway was accelerating international sales growth trends (up 27% on a constant-currency basis, representing its best growth performance since the third-quarter of 2012). To us, this confirms that a number of European markets and Japan are progressing at a similar trajectory as the U.S. when the Prime "flywheel" started to accelerate in late 2011. While Amazon remains in investment mode overseas--the segment posted an operating loss of $121 million--we see signs that international operations are beginning to build a foundation for profitable growth through increased general merchandise sales, international Prime memberships trending at a faster rate than the U.S., and increased third-party sales.

Based on AWS segment margins (27.9% excluding stock-based compensation), which appear to heading toward 30% over time, and improving international margin visibility, we now believe 7.5%-plus operating margins are achievable by 2020 and plan to raise our fair value estimate to $800 per share from $700. There is always a risk to our assumptions if Amazon embarks on a major investment cycle, but we're comfortable with this risk with recent investments more directly aligned with the core commerce and AWS platforms.

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About the Author

RJ Hottovy

Sector Strategist
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R.J. Hottovy, CFA, is a consumer strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He is responsible for consumer discretionary and staples research. He has covered the consumer sector as an analyst and director of global consumer equity research for Morningstar since joining the company in 2008, and specializes in a broad range of consumer categories including restaurants, footwear and apparel retailers, consumer electronics retailers, fitness clubs, home improvement and furnishing retailers, and consumer product manufacturers.

Before joining Morningstar, Hottovy was a director and senior stock analyst for Next Generation Equity and an analyst for William Blair & Co., specializing in a wide range of retail and consumer product companies. He also spent two years at Deutsche Bank, covering waste management, water utilities, and equipment rental stocks.

Hottovy holds a bachelor’s degree in finance and a second degree in computer applications from the University of Notre Dame, where he graduated magna cum laude. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Institute and the CFA Society of Chicago.

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