Will Amazon Shares Deliver in 2022?

Bulls Say

• Amazon is the clear leader in e-commerce and enjoys unrivaled scale to continue to invest in growth opportunities and drive the very best customer experience.
• High-margin advertising and Amazon Web Services are growing faster than the corporate average, which should continue to boost profitability over the next several years.
• Amazon Prime memberships help attract and retain customers who spend more with Amazon and reinforce a powerful network effect while bringing in recurring and high-margin revenue.

Bears Say

• Regulatory concerns are rising for large tech firms, including Amazon. The company may also face increasing regulatory and compliance issues as it expands internationally.
• New investments--notably in fulfillment, delivery, and AWS--should damp free cash flow growth. Also, Amazon’s penetration into some countries might be harder than in the United States due to inferior logistic networks.
• Amazon may not be as successful in moving into new retail categories, such as luxury goods, due to consumer preferences and an improved e-commerce experience from larger retailers.

Morningstar Analyst Dan Romanoff Says

Amazon.com (AMZN) dominates its markets, notably e-commerce and cloud services. It benefits from numerous competitive advantages and has emerged as the clear e-commerce leader, as its size and scale yield an unmatched selection of low-priced goods for consumers. The secular drift toward e-commerce continues unabated, with the company continuing to grind out market share gains despite its size. Prime ties Amazon’s e-commerce efforts together and provides a steady stream of high-margin recurring revenue from customers who purchase more frequently from Amazon’s properties. In return, consumers get one-day shipping on millions of items, exclusive video content, and other services; this results in a powerful virtuous circle where customers and sellers attract one another. Kindle and other devices bolster the ecosystem by helping attract new customers while making the value proposition irresistible for existing customers. Through Amazon Web Services, the company is also a clear leader in public cloud services.

Amazon’s advertising business is already large and continues to scale, thus offering an attractive option for marketers looking to access a vast audience with a variety of proprietary data points about those consumers. AWS, advertising, and subscriptions are growing faster than e-commerce with the exception of the 2020 spike in online shopping. We expect these three areas to be the main growth drivers over the next several years. This is critical, as each of these segments drives higher margins than the corporate average, which in turn should allow operating profit and earnings per share to outgrow revenue as margins expand.

From a retail perspective, we expect continued innovation to help drive further share gains. We also look for continued penetration into categories such as groceries and luxury goods that have not previously translated into the same level of success for Amazon as other retail categories. We see technology advancements in AWS and a bigger push to service enterprise customers as helping to sustain the company’s lead there. Overall, we see strong revenue and free cash flow growth for years to come.

Key Proprietary Morningstar Metrics

Fair Value Estimate: $4,100
Star Rating: 4 Stars
Economic Moat Rating: Wide
Moat Trend Rating: Stable

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