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Amazon Builds on Strength; Shares Look Modestly Undervalued

Amazon Builds on Strength; Shares Look Modestly Undervalued

Amazon reported earnings on Thursday. The most important takeaway for investors from Amazon's update is that the drivers of the firm's top and bottom-line outperformance are built to last and that the firm is enhancing the sources of its wide moat.

We're planning to raise our fair value estimate, and even after the rally this morning see shares as modestly undervalued.

Amazon's core retail profit functions saw accelerating growth, and with CEO Jeff Bezos' recent shareholder letter highlighting the strong growth in small and medium businesses sellers and the announcement that U.S. Prime membership prices will rise in May, we believe both of these revenue streams will remain healthy in the years to come.

Outside of the core drivers, we're seeing strong contribution from emergent drivers such as advertising, subscription services like Amazon Music and Kindle Unlimited, and international retail.

On top of retail, Amazon Web Services posted accelerating revenue growth and margin gains indicating that the business unit is managing competition from Google and Microsoft Azure.

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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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