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3 Things to Watch for From Amazon

3 Things to Watch for From Amazon

R.J. Hottovy: Heading into Amazon's first-quarter results, we believe investors should be focused on three areas: one, the pace of the company's revenue growth; two, the level of the company's investments; and three, some of the company's earlier-stage businesses.

With respect to revenue, Amazon opened themselves up to questions about the pace of growth during its fourth-quarter earnings conference call, where it guided to 10%-18% growth in the first quarter. This is down from 20% in the fourth quarter and 31% for all of fiscal 2018. While some of the decline can be explained by the shift to third-party sales as well as some disruption in its India market, some investors question whether or not the company is facing more intense competition. While this might be true, we do think the company will come in towards the higher end of this guidance led by a continued shift to a third-party marketplace as well as continued growth within its AWS segment.

Second, investments spent--while management noted that it expects to spend more on headcount, fulfillment, and AWS in 2019, we don't think this necessarily signals the company is going to be returning to low single-digit operating margins this year, down from 5% last year. In fact, we think the business model has evolved the last couple years with businesses such as AWS, third-party sales, and advertising becoming larger contributors that will help to offset these investments and actually lead to modest margin expansion in 2019.

This leads us to our final area of consideration, Amazon's more-emergent businesses. As the company continues to evolve, we think that investors should focus on businesses like advertising, AWS, and third-party sales. Not only do these represent higher margin opportunities for the company, but they also should lead to greater engagement among its customers and vendors as well as open up new areas of revenue growth.

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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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