Amazon Looks Undervalued
We’re boosting our view of Amazon’s growth potential and fair value estimate after earnings.
Sales for Amazon's North America e-commerce segment accelerated to 28%--the highest quarterly growth rate since the third quarter of 2013--demonstrating Amazon's importance as a distribution channel and reinforcing the network effect behind our wide moat rating. More important, we believe the operating leverage in Amazon's model is becoming increasingly apparent, evidenced by segment-level margins of 6.5% (4% including stock-based compensation). The flywheel created by Prime memberships and third-party sellers is also evident in Amazon's international segment, where electronics and general merchandise sales--which most closely track Prime membership growth, in our view--were up an impressive 38%. While the international segment is running at nominal profitability, we're comfortable with the investments Amazon is making overseas--including India, which we view as one of Amazon's highest-potential markets--based on Prime membership and third-party sellers in these regions, and we expect a more apparent margin story to emerge in the future. Finally, AWS' top-line growth of 58% and 30% segment margins (25% including stock-based compensation) continue to reinforce that this is much more than commoditized cloud storage business.
On the basis of the impressive top-line trends, Prime accelerating overseas, and an expanding AWS customer base, we're increasing our five-year average annual revenue growth target to 19% from 16%. We will leave in place our outlook for GAAP operating margins of 7.5% by 2020, but the more optimistic top-line forecast will move our fair value estimate to $900 from $800, suggesting that the shares are undervalued.
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