a cura di R.J. Hottovy, CFA, Equity Analyst di Morningstar
“Our view of Amazon.com Inc (AMZN) as having one of the widest moats in the consumer space is intact following the firm’s fourth-quarter update. For us, the highlight was the 190-basis-point uptick in gross margins to 33.8 per cent, which we find as the metric that best encapsulates our longer-term free cash flow drivers, including Prime membership growth and engagement, increasing third-party sales, and Amazon Web Services. While operating margins fell 20 basis points year over year, we attribute most of the softness to the Fulfilment, content, Prime, and Alexa/Echo investments that began in mid-2016 and are likely to persist through the first half of 2017. Still, we believe each of these investment areas strengthens Amazon’s ecosystem and lays the foundation for future margin expansion.
While critics might point to revenue growth of 22 per cent versus guidance of 17 per cent-27 per cent as a concern, we believe the growth rate is encouraging after stripping out a US$558 million negative foreign currency headwind and accounting for the ongoing shift to third-party units sold (where Amazon records just a commission on the sale). Paid unit growth of 24 per cent was a deceleration from the 28 per cent averaged in the first three quarters of the year, but we attribute the difference to lapping last year’s strong holiday demand among Fulfillment by Amazon (FBA) sellers (which continued throughout the year–evidenced by the 70 per cent increase in FBA sellers this year–and reinforces the network effect behind our wide Moat* rating).
We plan to increase our Fair Value Estimate to US$950 per share from US$900 based on time value of money adjustments, and we encourage investors to take advantage of any weakness following the fourth-quarter update. With greater confidence in Prime, Amazon’s third-party capabilities, and AWS coming out of the quarter–not to mention Alexa coming into its own as a unique long-term cash flow driver–we’re comfortable with our outlook for operating margins to grow to almost 8 per cent by 2021 from 3.1 per cent in 2016.
Content costs–particularly in international markets with Amazon recently rolling out video-on-demand services in each of its operating markets except China–additional Fulfillment center investments (including a new Prime Air cargo hub in Kentucky), and a strengthening US dollar are likely to blame for first-quarter guidance that fell modestly below expectations (revenue of US$33.25 billion-US$35.75 billion versus market expectations of US$36 billion, with operating income of US$250 million-US$900 million versus consensus estimates of US$1.350 billion). Nevertheless, we believe these investments are crucial to maintaining the health of the Amazon network effect, particularly with so many retailers and consumer brands embracing FBA services to satisfy consumers’ increased demand for expedited shipping and new content and features helping to differentiate Prime from other retailer’s online sales platforms. In fact, the aforementioned 70 per cent increase in FBA sellers came despite an increase in inventory storage fees during the quarter holiday season, reinforcing Amazon’s position as a vital channel for sellers and consumers alike. For this reason, we expect to see very little attrition when new FBA fees take effect in the United States on Feb. 22, which could also provide a source of operating profit upside throughout 2017 (where we’re currently assuming roughly 80 basis points of margin expansion, though admittedly weighted toward the back half of the year).
While we view Alexa/Echo as an early-stage product–management said it’s too early to quantify Amazon sales through Echo devices, but that it was pleased with engagement levels among current Echo owners–we still see several longer-term benefits. At the top of that list is enhancing Amazon’s network effect–a key source behind our wide Moat* rating–as Echo products offer other consumer companies direct access to Amazon users, which could have positive margin implications via increased third-party sales and advertising. Second, it keeps consumers locked into the Amazon ecosystem while promoting sales of margin-accretive subscription services such as Amazon Music or Audible. Third, we believe Amazon is just starting to scratch the surface of what it could do with Alexa, including licensing the technology to other products (a key theme coming out of this year’s AWS re:Invent conference). Finally, and perhaps most important, Alexa/Echo provide Amazon with unrivalled customer data, offering a key longer-term competitive advantage”.
