Pullback in Amazon Shares Creates Buying Opportunity
Concerns over profitability in the fourth quarter are overblown, creating a possible entry point for the wide-moat retailer, writes Morningstar’s R.J. Hottovy.
The big question from
However, we remain confident that the network effect underpinning our wide moat rating is intact and we believe the market is overreacting. Regarding fourth-quarter trends, we buy management's assertion that tremendous Fulfillment by Amazon usage by third-party sellers--a claim backed by our conversations with Amazon fulfillment center representatives--put a strain on fulfillment center capacity and required additional costs. While this probably means Amazon will invest in additional fulfillment capacity, we view these investments as crucial in maintaining the vibrancy of Amazon's third-party seller community while driving Prime member adoption, which is critical to our longer-term margin assumptions.
We don't plan material changes to our $700 fair value estimate, as we view the extra capacity as incremental and not the start of a major investment cycle. The capacity investments will push back our previous five-year GAAP operating income target of 6.5% by a year, but the free cash flow impact will be offset by a modest increase in our top-line outlook across each segment. We view today's pullback as an attractive opportunity for one of the widest moats in the consumer space today.
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