Amazon’s Heavy Investment Activity Justified
The firm may be spending heavily, but strong grown and consumer engagement trends show these dollars are being well spent, writes Morningstar’s R.J. Hottovy.
In what might become a recurring narrative for 2017,
The efficacy of these investments is dictated by their returns, and we'd be more concerned if Amazon hadn't retained its strong top-line growth (22.6%) as well as other metrics reaffirming the strength of the network effect underpinning our wide moat rating. These include a 52% increase in retail subscription services (mostly Prime membership fees, but also audio/video content and other subscriptions), a 36% increase in third-party seller service revenue, and a 58% increase in other revenue (suggesting healthy advertising revenue growth, which we view as an emergent long-term cash flow contributor), not to mention the rash of store closures across the U.S. retail industry.
Although first-quarter results were a shade below our expectations, we're planning a mid-single-digit percentage increase in our $950 fair value estimate based on increased optimism over AWS growth trajectory (including 30%-plus average annual revenue growth the next five years), Prime adoption in international markets, stable third-party vendor participation, nascent opportunities like Echo/Alexa and advertising, and U.S. tax reform adjustments.
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