We’re Boosting Our Fair Value as Amazon Delivers
The wide-moat firm is clearly laying the foundation for profitable growth overseas and continuing to expand margins in the U.S., writes Morningstar’s R.J. Hottovy.
After last quarter's softer-than-expected gross margin gains, all eyes were on this important metric in
Our other key takeaway was accelerating international sales growth trends (up 27% on a constant-currency basis, representing its best growth performance since the third-quarter of 2012). To us, this confirms that a number of European markets and Japan are progressing at a similar trajectory as the U.S. when the Prime "flywheel" started to accelerate in late 2011. While Amazon remains in investment mode overseas--the segment posted an operating loss of $121 million--we see signs that international operations are beginning to build a foundation for profitable growth through increased general merchandise sales, international Prime memberships trending at a faster rate than the U.S., and increased third-party sales.
Based on AWS segment margins (27.9% excluding stock-based compensation), which appear to heading toward 30% over time, and improving international margin visibility, we now believe 7.5%-plus operating margins are achievable by 2020 and plan to raise our fair value estimate to $800 per share from $700. There is always a risk to our assumptions if Amazon embarks on a major investment cycle, but we're comfortable with this risk with recent investments more directly aligned with the core commerce and AWS platforms.
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