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Amazon’s Moat Reinforced in the Cloud

Greater disclosure around its cloud computing business bolsters our view of the Internet giant's wide moat rating and longer-term cash flow opportunities.

With strong AWS segment profits, this leads to natural questions about the profitability of Amazon's e-commerce business, especially after stripping out the benefit from ancillary services like advertising. Still, with Amazon's high-velocity business model, we view North America segment margins of 3.9%%--up 120 basis points year over year--as healthy and consistent with our longer-term assumptions. Like previous quarters, much of the increase appears to be the result of Prime memberships and third-party units, which increased 32% and now constitute 44% of units sold. In our view, these trends signify a migration of buyers and sellers away from competing platforms, indicating a strong network effect.

We're only planning a modest increase to our $415 fair value estimate, as our outlook for low-double-digit average annual top-line growth and GAAP operating margins growing to 4.5% (6.0% adjusted) over the next five years is intact. The shares are trading above our fair value, but we would encourage investors to keep an eye out for any undue pressure as we head into traditionally the heaviest investment quarters of Amazon's fiscal year.

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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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