Skip to Content
Morningstar

Focus on Prime Boosts Amazon's 3rd Quarter

Focus on Prime Boosts Amazon's 3rd Quarter

Amazon's third-quarter update made a convincing case that the network effect underpinning their wide economic moat is strengthening. Most categories saw accelerating revenue trends indicating greater engagement among Prime members, third-party sellers, and Amazon Web Services users.

We believe investors should focus on three themes: 1) the shift in the U.S. from Prime acquisition to engagement via new products and services; 2) the jump in Prime international and the lifetime value potential it brings; and 3) continued monetization of AWS.

We believe that 2017 will go down as a pivotal year for Amazon Prime memberships, where the company's focus in North America shifted from Prime enrollment to engagement and where many international markets are seeing a Prime recruitment ramp similar to the U.S. in 2012-13. This is evident in the 59% increase in subscription services revenue, with Prime Day helping to drive U.S. members into new services, and a record number of Prime trials globally. Not surprising, this recruitment and engagement is also helping to drive third-party seller activity, where revenue growth remained robust at 40%. AWS posted healthy currency-neutral revenue growth of 42% and segment margins of 25.5%, which we attribute to the adoption of mission critical services and AWS Marketplace contract term changes.

We're planning a modest increase to our fair value estimate and see shares as undervalued today.

More in Stocks

About the Author

RJ Hottovy

Sector Strategist
More from Author

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.

Sponsor Center