Amazon.com
- Morningstar Rating: 4 stars
- Morningstar Economic Moat Rating: Broad
- Morningstar Uncertainty Rating: Medium
- Sector: Internet retail
Our list of affordable AI stocks starts with internet retailer Amazon.com. Amazon is the leading online retailer and marketplace for third-party sellers. Retail sales account for about 75% of total sales, followed by cloud computing, storage, databases and other Amazon Web Services offerings. Amazon's shares are undervalued by 11% compared to our fair value estimate of USD 240 per share.
"Amazon dominates its markets, especially in e-commerce and cloud services. The company benefits from numerous competitive advantages and has become the clear leader in e-commerce due to its scale and reach, offering consumers an unmatched selection of competitively priced products. The long-term trend towards e-commerce continues unabated and the company continues to grow its market share despite its size. Prime connects Amazon's e-commerce activities and provides a steady stream of high-margin recurring revenue from customers who shop more frequently on Amazon. In return, consumers receive same-day delivery of millions of items, exclusive video content and other services, creating a powerful virtuous cycle in which customers and sellers attract each other. The Kindle and other devices further strengthen the ecosystem by attracting new customers while making the value proposition irresistible to existing users.
Through Amazon Web Services, Amazon is also the clear market leader in public cloud services. In addition, the company's advertising business is already large and growing as advertising has found its way into Amazon's streaming offerings, making it an attractive option for marketers seeking access to a vast audience with a variety of proprietary data points about those very consumers. The growth of AWS and advertising is expected to continue to outpace the growth of e-commerce and be the key growth drivers over the next five years. This is critical as each of these segments generates higher margins than the company average, which in turn should result in both operating profit and earnings per share growth outpacing revenue as margins continue to increase.
From a retail perspective, we expect further innovation to help gain further market share in a post-lockdown world. We also expect to see further penetration of categories such as grocery and luxury goods, which have not yet seen the same success as other retail categories. We see technological advances at AWS and increased efforts to attract enterprise customers as factors that will help to maintain the company's leadership position in this area. Overall, we expect good sales and free cash flow growth in the coming years."
Dan Romanoff, Senior Analyst at Morningstar
Source
