Amazon AMZN released its third-quarter earnings report on Oct. 30. Here’s Morningstar’s take on Amazon’s earnings and stock.

Key Morningstar metrics for Amazon stock

  • Fair Value Estimate: $260.00
  • Morningstar Rating: ★★★
  • Morningstar Economic Moat Rating: Wide
  • Morningstar Uncertainty Rating: Medium

What we thought of Amazon’s Q3 earnings

Amazon’s third-quarter results beat the high end of guidance on the top line and would’ve beat it on the bottom line, save for $4.3 billion of unusual items. Sales grew 12% year over year in constant currency to $180.2 billion, while operating margin was 9.7% versus 11.0% a year ago.

Why it matters: Results are good, with upside on the top and normalized bottom lines, which is a good setup heading into the holiday season. The temperature on tariffs has eased as many trade deals have been forged, although China remains a work in progress. Consumer buying patterns are unchanged.

  • Amazon produced upside in all segments relative to our model, with the most upside coming in AWS, third-party sellers, and online stores. Grocery is performing well, and same-day delivery is rapidly expanding, which should support good growth for several years.
  • Excluding a $2.5 billion settlement with the FTC and $1.8 billion in severance, operating income would’ve been $21.7 billion, with 12.0% margin, versus the high end of guidance at $20.5 billion.

The bottom line: We raise our fair value estimate to $260 per share, from $245 previously, based on good results and guidance. The stock is jumping after hours, leaving shares fairly valued, in our view.

  • AWS was strong, as growth accelerated to 20% year over year, a pace that CEO Andy Jassy thinks can continue for “a while.” As such, the firm is capacity-constrained and plans to accelerate expansion based on demand signals. Demand is very strong for artificial intelligence, but core workloads also performed well.
  • Amazon detailed innovation within the AWS portfolio that is helping attract new customers. Anthropic’s use of Trainium 2, with its compelling price performance and the fact that Trainium 3 will arrive by the end of 2025, could extend AWS’ surging growth through next year.

Coming up: Guidance is slightly better than we anticipated for revenue and profitability, resulting in slight increases to our estimates over the next 18 months.

Fair Value estimate for Amazon stock

With its 3-star rating, we believe Amazon’s stock is fairly valued compared with our long-term fair value estimate of $260, which implies a 2025 enterprise value to sales multiple of 4 times and a 2% free cash flow yield.

Over the long term, we expect e-commerce to continue to take share from brick-and-mortar retailers. We further expect Amazon to gain share online. We believe that over the medium term, covid pulled forward some demand by changing consumer behavior and better penetrating some retail categories, such as groceries, pharmacy, and luxury goods, that previously had not gained as much traction online. We think Prime subscriptions and the accompanying benefits, combined with selection, price, and convenience continue to drive the retail story. We also see international as being a longer-term opportunity within retail. We model total retail-related revenue growing at an 8% compound annual growth rate over the next five years.

Economic Moat Rating

We assign a wide moat rating to Amazon based on network effects, cost advantages, intangible assets, and switching costs. Amazon has been disrupting the traditional retail industry for more than two decades while also emerging as the leading infrastructure-as-a-service provider via Amazon Web Services. This disruption has been embraced by consumers and has driven change across the entire industry as traditional retailers have invested heavily in technology in order to keep pace.

Covid-19 has accelerated change, and given the company’s technological prowess, massive scale, and relationship with consumers, we think Amazon has widened its lead, which we believe will result in economic returns well in excess of its cost of capital for years to come.

Financial strength

We believe Amazon is financially sound. Revenue is growing rapidly, margins are expanding, the company has unrivaled scale, and the balance sheet is in great shape. In our view, the marketplace will remain attractive to third-party sellers, as Prime continues to tightly weave consumers to Amazon. We also see AWS and advertising driving overall corporate growth and continued margin expansion.

As of Dec. 31, 2024, Amazon had $101.2 billion in cash and marketable securities, offset by $52.6 billion in debt. We also expect free cash flow generation, which suffered during covid as the company invested heavily in facility expansion, content creation, and its transportation network, to be pressured in the near-term from heavy capital expenditure investments for AWS. As this current investment cycle eases, we see a return to more normal cash flow generation levels.

Given that the company is still in a rapid growth and heavy investment phase, we do not expect it to pay dividends or repurchase shares. The company is acquisitive, but given its size, we characterize all acquisitions throughout its history as tuck-in, including the largest deal of $14 billion for Whole Foods in 2017 and the $8 billion MGM deal in 2022. We expect the focus to remain on growth, including heavy investment for AWS and delivery.

Risk and uncertainty

We assign Amazon an Uncertainty Rating of Medium. The firm must protect its leading online retailing position, which can be challenging as consumer preferences change and traditional retailers bolster their online presence. Maintaining an e-commerce edge has pushed the company to make investments in non-traditional areas, such as producing content for Prime Video and building out its own transportation network.

Similarly, the company must also maintain an attractive value proposition for its third-party sellers. Some of these investment areas have raised investor questions in the past, and we expect management to continue to invest according to its strategy, despite periodic margin pressure from increased spending.

From an environmental, social, and governance perspective, data breaches and service outages are a concern for any type of cloud service provider. As a retailer, Amazon has personal information for hundreds of millions of consumers around the world, while AWS hosts proprietary mission-critical data for enterprises.

AMZN Bulls say

  • Amazon is the clear leader in e-commerce, and it enjoys unrivaled scale to continue to invest in growth opportunities and drive the very best customer experience.
  • High-margin advertising and AWS 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. This reinforces a powerful network effect while bringing in recurring and high-margin revenue.

AMZN Bears say

  • Regulatory concerns are rising for large technology firms, including Amazon. Further, the firm may 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 penetrating new retail categories, such as luxury goods, due to consumer preferences and an improved e-commerce experience from larger retailers.

Get Morningstar insights in your inbox

Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.