We
are
raising
our
fair
value
estimate
for
wide-moat
Amazon
to
$193
per
share
from
$185
previously,
after
it
reported
good
first-quarter
results.
The
company’s
second-quarter
outlook
was
shy
of
our
aggressive
estimates,
while
it
noted
plans
to
materially
increase
data
center
investments
in
2024
to
meet
generative
AI
demand.

Changes
to
our
model
are
modest
but
centre
around
continued
profitability
enhancements.
Many
positive
trends
from
the
last
several
quarters
continued
with
notable
improvement
in
AWS
demand
and
additional
cost
savings
arising
from
fulfilment
and
cost
to
serve.
Strong
quarterly
performance
has
pushed
the
shares
meaningfully
higher
over
the
last
year,
and
as
such,
we
see
only
a
modest
upside
to
our
fair
value
for
investors.


Key
Morningstar
Metrics
for
Amazon


Fair
Value
Estimate:
$193

Morningstar
Rating:
3
stars

Morningstar
Economic
Moat
Rating:
Wide

Morningstar
Uncertainty
Rating:
High


AWS
and
Advertising
Growth

Overall
demand
continues
to
trend
favourably
across
business
units.
First-quarter
revenue
grew
13%
year-over-year
as
reported
and
13%
in
constant
currency
and
came
in
at
$143.3
billion,
compared
with
the
high
end
of
guidance
at
$143.5
billion.
Relative
to
our
estimates,
most
of
the
upside
was
derived
from
online
stores,
advertising,
and
Amazon
Web
Services
while
physical
stores,
third-party
seller
services,
subscriptions,
and
other
were
generally
in
line.
The
two
key
segments,
AWS
and
advertising,
increased
17%
and
24%,
as
reported,
respectively,
over
the
year-ago
period.
Amazon’s
advertising
growth
has
bested
its
large
internet
peers
over
the
last
year
or
so,
while
AWS’
growth
accelerated
both
year
over
year
and
sequentially.

Margins
remain
a
bright
spot,
and
we
continue
to
believe
there
is
room
for
expansion.
First-quarter
profitability
was
impressive,
with
operating
profit
at
a
best-ever
$15.3
billion,
compared
with
the
high
end
of
guidance
at
$12.0
billion.
This
resulted
in
an
operating
margin
of
10.7%,
compared
with
3.7%
a
year
ago.
Even
the
international
business
generated
positive
operating
profits
for
the
first
time
in
more
than
two
years,
which
bodes
well
for
the
long
term.


Amazon
Improves
Delivery
Speed

On
the
retail
side,
Amazon
has
focused
on
the
overall
customer
experience
by
expanding
its
selection
and
improving
delivery
speed.
These
factors
continue
to
drive
order
frequency
and
ticket
sizes
up
for
prime
members.
Management
noted
that
increased
delivery
speed
does
not
mean
higher
costs,
which
is
a
common
misconception
among
investors.
The
company
confirmed
that
consumers
continue
to
trade
down
and
seek
deals
when
possible,
which
has
been
our
working
assumption
given
the
macro
environment.
From
a
retail
sales
perspective,
revenue
from
online
stores
increased
7%,
physical
stores
increased
6%,
third
party
increased
16%,
and
subscription
services
increased
11%
(all
year
over
year,
as
reported).
Paid
unit
growth
accelerated
to
12%
year
over
year.

AWS
has
transitioned
from
stabilization
to
growth,
with
AI
contributing
meaningfully.
Management
believes
the
optimisation
efforts
it
saw
within
AWS
throughout
2023
have
fully
waned,
and
the
customer
emphasis
has
shifted
back
to
modernising
workloads.
This
marks
a
return
to
prepandemic
workload
migration
that
the
company
characterised
as
low-hanging
fruit,
as
most
use
cases
remain
on-premises.
Amazon
has
already
achieved
a
multibillion
revenue
run
rate
from
generative
artificial
intelligence
as
clients
are
signing
larger
and
longer-term
commitments.
Much
of
this
commentary
is
consistent
with
recent
remarks
from
Microsoft
regarding
its
Azure
business,
and
we
think
it
bodes
well
for
growth
over
the
next
couple
of
years.
AWS
revenue
accelerated
to
17%
year-over-year
growth
to
$25.0
billion,
compared
with
13%
growth
last
quarter
and
16%
a
year
ago.


Generative
AI
on
Amazon’s
Side

We
believe
Amazon
is
well-positioned
in
generative
AI
and
should
benefit
as
the
technology
adoption
gains
steam.
Management
believes
generative
AI
can
add
tens
of
billions
of
dollars
to
revenue
over
the
next
several
years
and
announced
various
new
AI-related
solutions
and
services,
including
Q,
a
generative
AI-powered
assistant
for
software
development.
On
AWS
overall,
we
think
the
migration
to
the
public
cloud
is
an
enormous
opportunity
and
remains
in
the
early
stages
of
evolution,
with
AWS
being
the
clear
leader.
Based
on
strong
AI
demand,
Amazon
plans
to
step
up
capital
investments
in
data
center
capacity
in
2024,
with
capital
expenditures
in
the
quarter
of
$14.9
billion
expected
to
be
the
low
point
for
the
year,
which
is
generally
consistent
with
what
we
were
anticipating.

In
our
view,
Amazon’s
profitability
improvements
have
been
remarkable,
and
we
continue
to
think
there
is
room
for
further
improvements.
In
retail,
the
regional
hub
model
has
yielded
both
cost
savings
and
improved
delivery
speeds.
Management
has
already
identified
improvements
that
can
be
made
to
the
regional
hubs,
even
as
it
continues
to
attack
other
margin
improvement
vectors.
We
also
note
that
more
immediately,
shipping
rates,
fuel
prices,
and
a
more
rational
labor
environment
contributed
to
margin
upside
in
the
quarter.
Strength
in
high-margin
advertising
was
also
a
margin
tailwind
and
should
remain
so
in
2024
and
beyond
as
ads
make
their
way
into
Amazon’s
streaming
portfolio.

While
slightly
below
our
estimates,
we
are
not
concerned
about
Amazon’s
second-quarter
guidance
and
ultimately
see
no
divergence
from
our
long-term
thinking.
The
firm’s
second-quarter
outlook
includes
revenue
of
$144.0
billion
to
$148.0
billion
and
operating
income
of
$10.0
billion
to
$14.0
billion.
These
are
shy
of
our
estimates.
However,
our
annual
estimates
were
slightly
below
FactSet
consensus
figures,
leaving
the
difference
mostly
immaterial.
After
allowing
for
an
upside
in
the
quarter
and
smoothing
various
expense
lines
over
the
next
year
or
so,
we
raised
our
fair
value
estimate
modestly.
We
see
a
path
to
continuous
margin
improvement
over
time,
even
if
these
gains
do
not
come
in
a
linear
fashion.

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