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3 Key Takeaways from Amazon's Earnings

We're planning to raise our fair value estimate and view Amazon as our top pick in online retail.

Amazon's AMZN blowout fourth-quarter results were highlighted by a 21% increase in revenue to $87.4 billion (versus guidance of $80.0 billion-$86.5 billion) and better-than-expected operating profit of $3.9 billion (versus $1.2 billion-$2.9 billion). We see three key takeaways.

Prime One-Day logistics investments are having a positive effect. Not only are they driving sales in higher-frequency categories (including grocery, where orders doubled in the quarter), but also spurring growth in higher-margin functions like third-party seller services (up 31% in constant currencies), subscription services (32%), and advertising (41%). While management committed to incremental Prime One-Day investments (including $1 billion in first quarter), we believe this benefit strengthens the network effect behind our wide moat rating and gives us greater confidence that 9% consolidated operating margins are achievable by 2024.

Also, Prime memberships have reached 150 million globally, up from 100 million at the end of 2017. We believe this has been a byproduct of international member growth, and believe that Amazon has the same monetization opportunities abroad that we've seen in the U.S. While we don't expect the international segment to post operating profits for several years (especially when factoring $1 billion in India small-sellers investments), we see international Prime member engagement as a long-term contributor.

AWS concerns have been overblown. It posted revenue growth of 34% and operating margins of 26.1% (improving a point versus the past two quarters). While AWS operating margins remain below last year's peak of 28% due to sales team and other investments, we still see a path to 30% over time as enterprise customers adopt higher-margin specialized services.

Based on the fourth-quarter strength and optimism regarding its margin profile, we're planning to raise our fair value estimate to $2,400 per share from $2,300 and view Amazon as our top pick in online retail.

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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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