Going Into Earnings, Is Amazon Stock a Buy, a Sell, or Fairly Valued?

Amazon is set to release its second-quarter earnings report on July 31. Here’s Morningstar’s take on what to look for in Amazon’s earnings and stock.

Key Morningstar Metrics for Amazon

• Fair Value Estimate: $240.00
• Morningstar Rating: ★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

Earnings Release Date

• Thursday, July 31, after the close of trading

What to Watch for in Amazon’s Q2 Earnings

• Tariffs, which keep getting whipsawed, are more directly impactful, particularly on first-party selling. We’ll look for discussion of the effects of higher prices from tariffs or supply chain issues. We estimate about 60% of cost of goods sold is from imports, and a third of that is from China, so the impact could be meaningful. Amazon is one of the biggest retailers in the world and should be able to negotiate the best terms from suppliers, so we would expect the company to actually gain share during these tariff wars.
• We’re curious about any insights into additional improvements within operations. Margin improvements based on efficiency gains have been a major theme for Amazon for the last year, and we expect more. Project Kuiper expenses should weigh on margins.
• We will see what the firm says about Prime Day, which was a four-day event this year, compared with two days last year. It appears the year-over-year impact per day was a lot lower, but because the event was twice as long, it probably came in somewhere around expectations. The company’s press release didn’t provide any details.

Fair Value Estimate for Amazon

With its 3-star rating, we believe Amazon’s stock is fairly valued compared with our long-term fair value estimate of $240 per share, which implies a 2025 enterprise value to sales multiple of 4 times and a 2% free cash flow yield.

Over the long term, we expect e-commerce to continue to take share from brick-and-mortar retailers. We further expect Amazon to gain share online. We believe that over the medium term, covid pulled forward some demand by changing consumer behavior and better penetrating some retail categories, such as groceries, pharmacy, and luxury goods, that previously had not gained as much traction online. We think Prime subscriptions and the accompanying benefits, combined with selection, price, and convenience continue to drive the retail story. We also see international as being a longer-term opportunity within retail. We model total retail-related revenue growing at an 8% compound annual growth rate over the next five years.

Read more about Amazon’s fair value estimate.

Economic Moat Rating

We assign a wide moat to Amazon based on network effects, cost advantages, intangible assets, and switching costs. Amazon has been disrupting the traditional retail industry for more than two decades while emerging as the leading infrastructure-as-a-service provider via Amazon Web Services. This disruption has been embraced by consumers and has driven change across the industry, as traditional retailers have invested heavily in technology to keep pace. Covid-19 has accelerated change, and given the company’s technological prowess, massive scale, and relationship with consumers, we think Amazon has widened its lead, which we believe will result in economic returns well in excess of its cost of capital for years to come.

Read more about Amazon’s economic moat.

Financial Strength

We believe Amazon is financially sound. Revenue is growing rapidly, margins are expanding, the company has unrivaled scale, and the balance sheet is in great shape. In our view, the marketplace will remain attractive to third-party sellers, as Prime continues to tightly weave consumers to Amazon. We also see AWS and advertising driving overall corporate growth and continued margin expansion.

As of Dec. 31, 2024, Amazon had $101.2 billion in cash and marketable securities, offset by $52.6 billion in debt. We also expect free cash flow generation, which suffered during covid-19 as the company invested heavily in facility expansion, content creation, and its transportation network, to be pressured in the near-term from heavy capital expenditure investments for AWS. As this current investment cycle eases, we see a return to more normal cash flow generation levels.

Read more about Amazon’s financial strength.

Risk and Uncertainty

We assign Amazon an Uncertainty Rating of Medium. The company must protect its leading online retailing position, which can be challenging as consumer preferences change and traditional retailers bolster their online presences. Maintaining an e-commerce edge has pushed the company to invest in nontraditional areas, such as producing content for Prime Video and building out its transportation network.

Similarly, the company must maintain an attractive value proposition for its third-party sellers. Some of these investment areas have raised investor questions in the past, and we expect management to continue to invest according to its strategy, despite periodic margin pressure from increased spending.

Read more about Amazon’s risk and uncertainty.

AMZN Bulls Say

• Amazon is the clear leader in e-commerce and enjoys unrivaled scale to continue to invest in growth opportunities and drive the very best customer experience.
• High-margin advertising and AWS are growing faster than the corporate average, which should continue to boost profitability over the next several years.
• Amazon Prime memberships help attract and retain customers who spend more with Amazon. This reinforces a powerful network effect while bringing in recurring and high-margin revenue.

AMZN Bears Say

• Regulatory concerns are rising for large technology firms, including Amazon. Further, the firm may face increasing regulatory and compliance issues as it expands internationally.
• New investments (notably in fulfillment, delivery, and AWS) should dampen free cash flow growth. Also, Amazon’s penetration into some countries might be harder than in the United States due to inferior logistics networks.
• Amazon may not be as successful in penetrating new retail categories, such as luxury goods, due to consumer preferences and an improved e-commerce experience from larger retailers.

This article was compiled by James Ubi.