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Morningstar
Stock Analyst Update

Cutting Amazon Stock’s Fair Value Estimate to $150 From $192 on Disappointing Q3 Earnings

Guidance weak and AWS performance a concern.

Dan Romanoff

Amazon Stock at a Glance

  • Current Morningstar Fair Value Estimate: $150
  • Amazon Stock Star Rating: 5 Stars
  • Economic Moat Rating: Wide
  • Moat Trend Rating: Stable

Amazon Earnings Update

Amazon (AMZN) reported disappointing third-quarter results and provided investors with soft fourth-quarter guidance, with the performance of AWS being our greatest near-term concern. This quarter stings, as this was supposed to be the quarter where Amazon had finally lapped pandemic-fueled issues. We continue to believe long-term growth driven by e-commerce proliferation, AWS, and advertising, but the near term is clouded by a variety of macroeconomic issues, including currency headwinds, high inflation, soaring energy costs, and deceleration in AWS. We can look through these issues but we believe they are likely to persist throughout 2023, which decreases our confidence over the medium term as well. We are lowering our growth and profitability assumptions, and in turn our fair value estimate drops to $150 per share, from $192 previously. Still, we are not ready to throw in the towel on Amazon and we see shares as attractive, but clearly the company has still not found stable footing on its path out of the pandemic.

Third-quarter revenue grew 15% year over year as reported, or 19% in constant currency, to $127.1 billion, compared with guidance of $125 billion to $130 billion. Currency continued to worsen throughout the quarter, which crimped revenue growth. From a retail perspective, online stores grew 7% year over year as reported, physical stores improved 10%, third-party seller services grew 18%, and subscription services increased 9%. Prime Day was held in the third quarter of 2022, compared with the second quarter in 2022, which resulted in an artificial 400 basis points of revenue growth for Amazon this quarter. The two most critical segments, AWS and advertising, grew 27% and 25% over the year-ago period, respectively. AWS enjoyed strong backlog growth, but was proactively helping customers manage cloud computing costs as the economy slows. Compared with our model, online stores, subscription services, and AWS drove the revenue miss.

Dan Romanoff does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.