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Amazon Evolving Into Profitable Growth Company

We see potential for free cash flow growth from AWS, third-party sales, and Prime membership tiers.


R.J. Hottovy: Wide-moat Amazon capped off 2018 with strong fourth-quarter results that confirmed our views about the company's evolution from being not just a growth company, but a profitable growth company with multiple free cash flow layers. 

While some of the marketplace are looking at the company's first-quarter revenue guidance, calling for a 10% to 18% growth, compared to the 20% growth the company posted in the fourth quarter as a negative, we encourage investors to look at the company's entire portfolio, particularly AWS, advertising, third-party sales, and Prime membership tiers, and look at the potential free cash flow that these businesses could bring. 

Another area of concern is that the company said that 2019 would be a heavier investment year. We don't think this is going to be the same magnitude that we saw in 2016 and 2017, and still believe that the different drivers such as advertising and AWS positions the company for at least 100 basis points of operating margin growth to around 6%. 

Looking forward, while the retail component of the business is starting to slow a bit, as it naturally matures, I think these other business lines provide the company with a lot of different options and end up being high margin which provides the company with the ability to make other investments within the business.

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