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Building Blocks Firmly in Place for Amazon's Success

Building Blocks Firmly in Place for Amazon's Success

We see Amazon as undervalued. The pickup in expenses this year aren't a concern given the evidence that the network effect supporting Amazon's ecosystem remains strong.

The more important takeaway for investors is that we see signs that the building blocks of longer-term free cash flow may be evolving and becoming more durable, lending further credence to our wide-moat rating.

Our medium-term operating margin assumption of 7% to 8% has long been a function of Prime memberships, third-party sales, and Amazon Web Services, with advertising and Internet of Things/licensed technology offering upside. We believe these pillars are intact--supported by 130 basis points in gross margin expansion--but also becoming more dynamic. For instance, Whole Foods will give Amazon various ways to engage with Prime members (and drive higher membership fees), while adding brands like Nike to the platform could encourage greater adoption of Fulfillment by Amazon and other services among third-party sellers.

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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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