From Morningstar: 2024-08-30 04:27:00

Since reporting earnings on August 1, Amazon (AMZN) stock has dropped more than 7% but is still up 12.4% in 2024. With shares falling nearly 12% in the third quarter, Morningstar believes the stock is trading in undervalued territory with a fair value estimate of $195 per share.

Amazon reported a strong quarter, showing revenue above guidance but below consensus. The third-quarter guidance was light, causing shares to drop from $184 to $168 post-earnings. Despite this, Morningstar considers the stock attractive with a wide moat rating, being a leader in e-commerce, cloud services, and AI.

Amazon’s economic moat is based on network effects, cost advantages, intangible assets, and switching costs. The retail giant continues to disrupt the industry and widen its lead over competitors, driving economic returns over its cost of capital for years to come.

Financially, Amazon is sound with rapid revenue growth, expanding margins, and a strong balance sheet. The company’s retail business has a wide moat, while AWS and advertising have a narrower moat, collectively driving overall corporate growth and margin expansion.

Risk and uncertainty for Amazon are high due to competition, consumer behavior changes, and the need to protect its leading position in online retail. Regulatory concerns and compliance issues may pose challenges as the company expands internationally, impacting free cash flow growth.

Bulls believe Amazon’s leadership in e-commerce, scale, high-margin advertising, and AWS growth will drive profitability. Prime memberships and customer loyalty reinforce a powerful network effect, bringing in recurring revenue. Bears are concerned about regulatory issues, potential challenges in international expansion, and new investments impacting free cash flow growth.



Read more at Morningstar: Why we Think Amazon Stock is Now a Buy