Amazon's Q4 Strength; Bezos to Step Down; FVE to $4000

Wide-moat Amazon AMZN reported strong fourth-quarter results, including material upside to revenue, an EPS blowout, and upside to its revenue outlook for the first quarter. Amazon remains well positioned to prosper from the shift toward e-commerce during the COVID-19 pandemic (with particular strength in groceries and staples) in the near term, but also the secular shift toward e-commerce in the long term. We are particularly impressed by margin performance, which we think is a preview of Amazon’s earnings power as COVID-19 costs roll away and the company grows into its 50% fulfilment capacity expansion from 2020.

Amazon also announced that CEO Jeff Bezos will transition to the role of executive chairman in the third quarter and will be replaced by Andy Jassy, CEO of AWS. We note Mr Bezos will remain actively involved with the company, and Mr Jassy has been at the company for 23 years and was a driving force behind the foundation and growth of AWS. We are raising our fair value estimate to $4,000 per share from $3,630 based on the time value of money and fine tuning our model for results and guidance.

Fourth-quarter revenue grew 44% (42% in constant currency) year over year to $125.6 billion, compared with FactSet consensus of $120.0 billion and guidance of $112 billion-$121 billion. Online Stores and Other revenue (which includes Advertising) were well ahead of our expectations, and we remain optimistic about Amazon’s advertising prospects in particular. AWS, Physical Stores, Third Party Seller Services and Subscription Services were fairly close to our estimates. AWS benefited from feature additions and continued traction in enterprise customers and grew 66% year over year.

Operating margin was 5.5%, compared with 4.4% a year ago and our slightly above consensus estimate of 3.8%. This includes $4 billion of COVID-19-related costs, while Amazon also opened additional fulfilment centers during the quarter which limited further margin upside.

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