NAS AMZN CompanyReport 20201101

Morningstar Equity Research
Amazon.com Inc AMZN (NAS) | QQQQ

Last Price Fair Value Uncertainty Economic Moat™ Moat Trend™ Stewardship Industry Group
3,036.15 USD 3,600.00 USD High Wide Stable Exemplary Retail - Cyclical
Coronavirus-Related Consumer Behavior Unlocking New Vital Statistics
Revenue and Margin Opportunities for Amazon Market Cap (USD Mil) 1,523,392
52-Week High (USD) 3,552.25
52-Week Low (USD) 1,626.03
R.J. Hottovy, CFA Business Strategy and Outlook 01 Nov 2020 52-Week Total Return % 70.9
Sector Strategist
YTD Total Return % 64.3
Morningstar Amazon's disruption of the retail industry is well documented, but
Last Fiscal Year End 31 Dec 2019
it continues to find ways to evolve. Its operational efficiency,
5-Yr Forward Revenue CAGR % 21.9
network effect, and a brand intangible asset give its marketplaces
5-Yr Forward EPS CAGR % 36.7
sustainable competitive advantages that few, if any, traditional
Price/Fair Value 0.84
retailers can match. The combination of competitive pricing,
Important Disclosure Valuation Summary and Forecasts
unparalleled logistics capabilities and speed, and high-level
The conduct of Morningstar’s analysts is Fiscal Year: 2018 2019 2020(E) 2021(E)
governed by Code of Ethics/Code of Conduct customer service makes Amazon an increasingly vital distribution Price/Earnings 74.2 80.3 83.0 57.9
Policy, Personal Security Trading Policy (or
an equivalent of), and Investment Research
channel for consumer brands (especially in light of COVID-19 EV/EBITDA 26.4 25.8 32.2 22.1
Policy. For information regarding conflicts operating restrictions hindering physical retailers). Even with more EV/EBIT 59.0 64.4 70.4 43.5
of interest, visit http://global.morningstar
retailers looking to expand online, we believe Amazon will maintain Free Cash Flow Yield % 2.6 2.8 2.4 3.9
.com/equitydisclosures
Dividend Yield % — — — —
its consumer proposition through expedited Prime shipping, an
The primary analyst covering this company
does not own its stock. expanding digital content library, and new customer services.
Aided by more than 540 million estimated global active users, more Financial Summary and Forecasts (USD Mil)
Research as of 01 Nov 2020 Fiscal Year:
than 175 million global Prime members, and an unrivaled fulfillment 2018 2019 2020(E) 2021(E)
Estimates as of 31 Oct 2020
Pricing data as of 30 Oct 2020 15:15 Revenue 232,887 280,522 381,593 487,993
infrastructure, Amazon owns one of the wider economic moats in
Rating updated as of 01 Nov 2020 16:55 Revenue YoY % 30.9 20.5 36.0 27.9
the consumer sector and is likely to reshape retail, digital media,
EBIT 12,420 14,540 21,812 35,349
Currency amounts expressed with "$" are in enterprise software, and other categories for years to come.
U.S. dollars (USD) unless otherwise denoted. EBIT YoY % 202.4 17.1 50.0 62.1
Net Income, Adjusted 10,073 11,588 18,650 26,859
Contents Key top-line metrics--including gross merchandise volume growth Net Income YoY % 232.1 15.0 60.9 44.0
(a 18% compound annual growth rate the past five years), total Diluted EPS 20.23 23.01 36.57 52.46
Business Strategy and Outlook
physical and digital units sold (22% CAGR), and third-party units Diluted EPS YoY % 228.7 13.8 58.9 43.5
Morningstar Analysis
sold (28% CAGR)--continue to outpace global e-commerce trends, Free Cash Flow 12,832 16,969 30,531 53,227
Analyst Note -
suggesting that Amazon is gaining share while fortifying its Free Cash Flow YoY % -233.1 32.2 79.9 74.3
Fair Value & Profit Drivers 2
21
network effect. On top of its impressive growth, Amazon's Historical/forecast data sources are Morningstar Estimates and may reflect adjustments.
Scenario Analysis
Economic Moat 3 COVID-19-related buyer and seller acquisition is helping to build a
Moat Trend 4 more visible margin expansion story, despite ongoing investment
Profile
Bulls Say/Bears Say 6 for Prime one-day shipping (including fulfillment infrastructure/capacity),
Financial Strength 7 content deals, AmazonFresh, hardware such as the Amazon is among the world's highest-grossing online retailers, with $281
Risk & Uncertainty 7 Echo/Alexa-enabled products, AWS, and physical store expansion. billion in net sales and approximately $365 billion in estimated
Management & Ownership 9 While some capital decisions haven't always yielded strong physical/digital gross merchandise volume (GMV) in 2019. Online product
Analyst Note Archive 10 and digital media sales comprised 50% of net revenue in 2019, followed
returns, we're optimistic that Amazon can approach 10% operating
by commissions, related fulfillment and shipping fees, and other third-party
Additional Information -
margins by 2024 based on Prime member adoption/engagement, seller services (19%), Amazon Web Services' cloud computing, storage,
Morningstar Analyst Forecasts 14
new subscription services across multiple categories, AWS database, and other offerings (13%), Prime membership fees and other
Comparable Company Analysis 18 subscription-based services (7%), product sales at Whole Foods and other
segment margins around 30%, fulfillment scale, new third-party
Methodology for Valuing Companies 20 physical store retail formats (6%), and advertising services and cobranded
seller services, expanded advertising offerings, and technology credit cards (5%). International segments constituted 27% of Amazon's
licensing arrangements. non-AWS sales in 2019, led by Germany, the United Kingdom, and Japan.
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Fair Value & Profit Drivers 01 Nov 2020 should allow for higher gross margins. We also forecast
We're raising our fair value estimate to $3,600 per share operating margin expansion through increasing expense
from $3,500 based on more optimistic near-term revenue leverage (particularly in the marketing and general &
forecasts, as COVID-19-related changes in consumer administrative expense line items), contribution from AWS,
behavior are helping to accelerate Amazon's online and accelerating third-party unit sales. Our model calls for
commerce and related-service offerings, partly tempered by 5.7% GAAP operating margins in 2020 (versus 5.2% last
near-term COVID-19-related expenses. In Amazon's case, year) but approaching 10% over the next five years, based
we do not believe traditional price/earnings and enterprise on its strong competitive positions in AWS and North
value/EBITDA metrics are meaningful, given the impact that American e-commerce, as well as early indications of
near-term investments are expected to have on near-term success in certain international markets.
margins. Still, we believe Amazon warrants a premium
valuation based on its wide economic moat, meaningful Scenario Analysis
avenues for growth, and longer-term margin expansion The primary variable in our scenario analysis is
potential. management's ability to profitably increase the top line for
its core products, which provides the impetus for our high
We expect COVID-19-related demand to drive online uncertainty rating. Our base case already assumes 22%
commerce market share gains in 2020, driving revenue annual average revenue growth between 2020 and 2024,
growth of around 36% (up from previous expectations of but an accelerated shakeout among traditional retailers,
35%). We also expect average annual revenue growth of increased consumer adoption of Whole Foods/Amazon
22% the next five years due to greater engagement among Fresh, greater digital media sales stemming from new
Amazon Prime members, increased engagement among Kindle or other hardware devices, and acceptance of
third-party sellers, digital content sales, international Amazon Web Services could push this number closer to
expansion (both established and nascent markets), and 25%. We've also assumed that operating margins grow at
emergent business segments like advertising and a slightly faster pace than our base case under these
technology licensing. With respect to Amazon's sales mix, assumptions--between 10%-11% by 2024--thanks to
we forecast online retail revenue to grow 21% annually over increased scale and operating efficiencies and greater
the next five years, with smaller segments like physical engagement from Amazon Prime members (including
stores, third-party seller services, subscription services, accelerating Prime Fresh adoption), international scale
AWS, and advertising growing 4%, 25%, 21%, 25%, and improvements, as well as greater contribution from
32%, respectively, over the same period. higher-margin third-party sales and AWS business. Our fair
value estimate would be approximately $5,000 per share
We forecast a slight decrease in gross margins to 40.8% in using these assumptions.
2020 (compared with 41.0% in 2019) due to
COVID-19-related expenses, but expect gross margins will Assuming Amazon devices face greater online commerce
improve to 42.6% over the next five years. Amazon's competition than we have forecast, emergent rivals stall
growing clout with suppliers and advertisers, a higher AWS' growth trajectory, or regulations impede international
proportion of third-party units in the sales mix, AWS expansion efforts, our base-case revenue growth estimates
customer acquisition and greater engagement among could prove aggressive. Our downside scenario assumes
existing AWS customers, and advertising service offerings average annual top-line growth around 19% from 2020 to

share gains in the years to come. Despite fulfillment,

technology (hardware devices, Alexa, and AWS), and
content investments as well as additional expenses for
COVID-19, we expect Amazon can generate economic
returns ahead of our cost of capital assumption over an
extended horizon, supporting our wide moat rating.
One of Amazon's key advantages is the operational

efficiency of its fulfillment and distribution network, which
satisfies consumer demand for free and expedited shipping
(including expanded one-day delivery options for Prime
members starting in 2019). This allows Amazon to generate
strong cash flow, which in turn can be reinvested in
advertising, customer service, and website enhancements
that keep its marketplace robust and customer loyalty
2024, though missteps expanding AWS or Whole Foods strong. In fact, we believe Amazon's brand has come to
integration issues could push these estimates even lower. represent low prices, a wide selection, convenience, and
We'd also expect less margin expansion under these superior customer service--a rare combination among
assumptions, with reported operating margins of just under retailers.
9% by 2024. This scenario yields a fair value estimate of
$2,560 per share. Amazon also benefits from a network effect, as low prices,
an expansive breadth of products, and a user-friendly
Economic Moat interface attract millions of customers, which in return
The traditional brick-and-mortar retail industry has attract merchants of all kinds to Amazon.com, including
undergone a period of rapid transformation the past several third-party sellers on Amazon's Marketplace platform
years, a trend that will likely continue as the industry (which represented 53% of total units sold in 2019) and
recovers from COVID-19. With nonexistent customer wholesalers/manufacturers selling directly to Amazon.
switching costs and intense competition, we've already According to our research, the percentage of traffic to
seen several retailers exit the industry while a host of others Amazon derived from search has fallen in recent years at a
struggle to reverse deteriorating fundamentals. Market time when other online retailers have become more
consolidation among mass merchants like Walmart and dependent on search. We think this indicates that Amazon
Costco has played a role in this trend, as have is increasingly becoming the starting point for online
direct-to-consumer investments by key manufacturers. purchases, akin to a mall anchor tenant. Additionally,
However, we view Amazon as the most disruptive force in customer reviews, product recommendations, and wish lists
retail. Its operational efficiency, network effect, and laser increase in relevance as more consumers and products are
focus on customer service provide its marketplaces with added to the Amazon platform, enhancing its network effect.
sustainable competitive advantages that traditional
retailers cannot match; this should yield additional market We like Amazon's ability to compete in digital media, given
its sizable customer base, the symbiotic hardware/software

ecosystem of its Kindle, Fire TV, Dash, and Echo products, continue to see increased adoption. The most obvious
and intriguing advertising and licensing possibilities with example is online grocery, which has accelerated
Amazon's Echo and other Alexa-enabled voice-recognition significantly based on our discussions with logistics industry
products. We still view the Kindle suite of products as executives. With a spike in telecommuting, AWS also
customer-acquisition tools that add multiple layers of stands to benefit from increased enterprise cloud
upside to our base-case assumptions, including additional computing, storage, networking/content delivery, mobile
Prime memberships and engagement levels, accelerating app, and digital security usage. On top of increased
digital media sales, and a positive halo effect on general enterprise-level cloud demand, we anticipate Amazon will
merchandise sales. We believe Amazon will continue to benefit from increased demand for entertainment content,
develop into a formidable player in digital media, given its either directly (its own content portfolio) or indirectly (AWS
vast content offerings, inroads into new verticals (including functionality for Netflix and other content providers).
video games), and ability to sell hardware as a loss leader. Amazon has done a better job diversifying its product mix
toward more consumer staples in recent years, which should
We believe Amazon Web Services has similarly developed help to insulate the company from a global economic
cost advantage, intangible asset, and network effect moat slowdown or recession.
sources. Amazon's public cloud computing offerings
possess more than 3 times the computing capacity in use Moat Trend
than the next 10 largest providers combined (based on our We assign Amazon a stable moat trend. We have confidence
estimates), providing the company with scale advantages in the company's ability to profitably increase its top line
and often making it the preferred name for corporations and capture share from traditional retailers in commoditized
looking to reduce information technology expenditures. We categories, but a lack of visibility regarding Amazon's
expect AWS to generate $45 billion in revenue during 2020, international growth prospects (namely India, where the
and we forecast average annual revenue growth of 25% country’s online commerce legislation changes restrict
over the next five years. With recent investments in exclusive product sales, ban the sale of products from
additional capacity and other innovations, we expect AWS vendors in which e-commerce companies have an equity
to become an increasingly positive gross margin interest, and restrict discounts) and investment plans amid
contributor--the segment posted a 26.3% segment increased competition from emergent e-commerce rivals
operating margin in 2019, and we believe it can deliver like Walmart and Target restricts our moat trend to stable.
roughly 30% operating margins over a longer We're optimistic that Amazon can sustain its U.S. leadership
horizon--because of its highly scalable nature and other even with potential increases to postal service rates or other
mission-critical services outside of cloud storage, as well regulatory changes, as we believe speed of delivery has
as a network of third-party software providers selling on become equally or even more important than pricing from
AWS Marketplace. the perspective of consumer purchasing decisions, favoring
Amazon's efficient fulfillment/sorting center network
As one of the global leaders in online commerce, Amazon capabilities. In addition, we believe COVID-19 containment
finds itself in a unique position amid the global COVID-19 efforts will have a longer lasting impact on consumer
outbreak. As containment efforts persist and consumers behavior and invite additional investment from competitors
isolate themselves, we believe certain Amazon services will that have had to fully embrace online retail strategies due

to physical store closures.

Bulls Say/Bears Say
Bulls Say Bears Say

OAmazon dominates North America's online retail OAmazon's future margin expansion trajectory could be
industry with estimated gross merchandise volume uneven given its global logistics needs, content
(GMV) of $275 billion in the region during 2019. investments, increased competition, and physical
store/healthcare initiatives.
OWith more than half of the world's Internet users
coming from developing markets, Amazon has OInternational expansion brings challenges such as
meaningful international growth opportunities for its local e-commerce regulations, incremental fulfillment
marketplaces, cloud services, advertising, and infrastructure investment needs, and incumbent
devices. rivals.
OAmazon's devices--including Kindle, Fire TV, Dash, OAmazon Web Services faces competition from well-
Echo, and other Alexa-enabled products--are capitalized peers like Microsoft Azure and Google,
intriguing customer acquisition/retention tools that possibly resulting in more aggressive price
also promote Prime member engagement and AWS competition and longer-term margin expansion
capabilities. pressure.

Five Year Adjusted Cash Flow Forecast (USD Mil) Financial Strength
Amazon is in sound financial health, with total debt of $32.9
2020(E) 2021(E) 2022(E) 2023(E) 2024(E)
Cash and Equivalents (beginning of period) 36,092 58,667 102,885 154,617 178,134 billion and cash and marketable securities of $68.4 billion
Adjusted Available Cash Flow 47,771 69,679 76,119 83,061 93,765 as of September. Despite COVID-19-related expenses
Total Cash Available before Debt Service 83,863 128,346 179,005 237,678 271,899
(including facility productivity measures, protective
Principal Payments -1,307 -1,141 -1,773 -1,510 -3,339 equipment, cleaning, wage increases, and COVID-19 testing
Interest Payments -1,648 -1,730 -1,782 -1,836 -1,891
Other Cash Obligations and Commitments -11,053 -7,837 -4,433 -2,211 -1,956
capabilities) and future fulfillment capacity investments, we
Total Cash Obligations and Commitments -14,008 -10,708 -7,988 -5,557 -7,186 forecast Amazon's free cash flow (cash from operations less
capital expenditures) will average more than $65 billion
Cumulative Annual Cash Flow Cushion
annually over the next five years (including $36 billion in
Cash Flow Cushion
Possible Liquidity Need 2020 and growing to about $89 billion in 2024, with some
year-to-year volatility for various investment cycles), which
should be sufficient for funding operations, investing in new
technology and fulfillment capacity, physical retail
expansion, and acquisitions.
Risk & Uncertainty

Adjusted Cash Flow Summary Despite its leading position in North American and European
% of Commitments
USD Millions e-commerce, Amazon faces several potential risks.
Beginning Cash Balance 36,092 79.4 Impairment to Amazon's low-price positioning, whether real
Sum of 5-Year Adjusted Free Cash Flow 370,395 815.0
Sum of Cash and 5-Year Cash Generation 406,487 894.4 or perceived, could have an adverse impact on
fundamentals. Amazon must maintain its value proposition
Revolver Availability 2,000 4.4
and logistics efficiency to drive marketplace traffic while
Asset Adjusted Borrowings (Repayment) — —
competing with other merchants for market share. This
Sum of Cash, 5-Year Cash Generation, Revolver and Adjustments 408,487 898.8 includes managing Amazon Prime fees, but we believe the
Sum of 5-Year Cash Commitments -45,447 —
combination of fulfillment capabilities, expanded digital
content offerings, and new subscription and streaming
offerings will keep Prime membership churn to a minimum.
Other execution risks include expansion into peripheral
business lines and physical stores (including Whole Foods),
which could distract management or lead to poor
capital-allocation decisions. International growth brings
regulatory challenges, as foreign governing bodies are
constantly amending online commerce laws, often to the
benefit of local incumbents. We also expect COVID-related
changes in consumer behavior will have a lasting impact on
the industry and drive near-term operating volatility.On top
of execution risk, we see three other sources of potential

risk: (1) regulatory, including the threat of increased shipping

fees from the U.S. Postal Service or other regulated carriers,
higher taxes, restrictions regarding simultaneously
operating a first- and third-party marketplace, and
antitrust/anticompetition investigations; (2) direct and
indirect competition from other retailers or technology firms;
and (3) intangible asset impairment, including data
breaches, concerns over inappropriate data usage, or
consumer fatigue. On the other hand, we see sources of
upside risks from more diversified/specialized AWS
offerings, expanded Fulfilment by Amazon capabilities, the
rollout of Amazon Fresh across additional urban centers,
new potential pricing tiers or add-on features for Amazon
Prime memberships, new advertising channels, or new
technologies like Zoox.

Management & Ownership

Stewardship 01 Nov 2020
Management Activity Chairman and CEO Jeff Bezos founded Amazon.com in 1994.
We view Amazon's management team as Exemplary in
Name Position Shares Held Report Date* InsiderActivity terms of corporate stewardship. Bezos owns about 15% of
JEFFREY P. BEZOS Director, Chairman, CEO and 54,474,763 28 Aug 2020 1000000
President, Ten Percent Owner, the shares (and voting rights for 20%), takes no equity
Director compensation or bonus pay, and collects a paltry salary.
MR. ANDREW JASSY CEO Amazon Web Services 89,544 17 Aug 2020 8044
MR. THOMAS J. (TOM) Senior Vice President and CFO 56,744 15 May 2015 — Although the board is small, it is elected every year, receives
SZKUTAK no cash compensation, avoids insider relationships, and
MR. JEFFREY BLACKBURN Senior Vice President 48,967 18 Feb 2020 —
JEFFREY A. WILKE CEO Worldwide Consumer 10,000 19 Oct 2020 1950 hasn't implemented antitakeover provisions. The company
THOMAS O. RYDER Director,Director 9,319 02 Dec 2019 — also provides a fair amount of supplementary financial data
MR. JONATHAN J. Director,Director 7,538 04 May 2020 — in its financial reports. Our only complaint is that specific
RUBINSTEIN
disclosures have not increased as the company has
*Represents the date on which the owner’s name, position, and common shares held were reported by the holder or issuer.
expanded into new areas, including digital downloads,
device sales, and user/Prime membership data (though to
Fund Ownership its credit, management broke out AWS as a separate
% of Shares % of Fund Change
Top Owners Held Assets (k) Portfolio Date business unit in the first quarter of 2015 and disclosed that
Vanguard Total Stock Market Index Fund 2.38 4.03 -11 31 Oct 2020 the company surpassed 150 million Prime memberships
Vanguard US Total Market Shares ETF 2.38 3.98 -11 31 Oct 2020 globally at the end of 2019).
Vanguard 500 Index Fund 1.74 4.81 114 31 Oct 2020
Invesco QQQ Trust 0.91 10.94 — 31 Oct 2020
SPDRÂ® S&P 500 ETF Trust 0.88 4.96 -55 31 Oct 2020 Amazon has made investments to sustain its moatworthy
businesses, including its global fulfillment infrastructure, a
Concentrated Holders
vast portfolio of audio and video content, and Amazon Web
MLC WS Index Plus Growth Portfolio 0.00 — 0 31 Oct 2020
Xtrackers MSCI USA Consumer Disc ETF 0.00 33.85 — 31 Oct 2020
Services capacity. However, charges tied to the Fire Phone
iShares S&P 500 Cnsmr Discr Sect ETF 0.00 33.57 — 31 Oct 2020 in 2014 and operating losses in certain international markets
JNL/Mellon Cnsmr Disctnry Sect Fd 0.03 33.37 -1 31 Oct 2020 underscore the importance of Amazon being selective with
FidelityÂ® MSCI Consumer Discret ETF 0.02 32.71 — 31 Oct 2020
its capital-allocation decisions. We believe the lack of
consumer interest in the Fire Phone was a wakeup call for
Institutional Transactions
Shares management's capital decisions, as the company runs the
% of Shares % of Fund Bought/
Top 5 Buyers Held Assets Sold (k) Portfolio Date risk of losing key personnel without stronger returns on
BlackRock Inc 5.56 3.07 895 31 Oct 2020
invested capital, owing to the equity component of many
Mellon Investments Corporation 0.46 4.04 789 31 Oct 2020
Bank of New York Mellon Corp 0.90 3.33 704 31 Oct 2020 employees' compensation structure. However, we're
Jackson National Asset Management LLC 0.35 — 693 31 Oct 2020 comfortable with this risk, based on recent capital discipline
Legg Mason Partners Fund Advisor, LLC 0.26 83.23 595 31 Oct 2020
and investments that have been more directly aligned with
the core commerce marketplace and AWS platforms.
Top 5 Sellers
Advisor Group Holdings, Inc. 0.03 1.57 -35,259 31 Oct 2020

Capital Research and Management Company 3.17 83.36 -1,857 31 Oct 2020
APG Asset Management 0.19 4.31 -984 31 Oct 2020
Apg All Pensions Group 0.19 4.31 -984 31 Oct 2020
Fred Alger Management, LLC 0.13 5.98 -715 31 Oct 2020

Analyst Notes
Acceleration Across Amazon's Services Portfolio We're planning to raise our $3,500 fair value estimate by a
Reinforces Its Longer-Term Margin Opportunity 30 Oct few percentage points to account for this quarter's upside
2020 and see shares as modestly undervalued.
Posting another quarter of exceptional growth (revenue of
$96.2 billion, up 37.4%, versus guidance of $87-$93 billion) Looking ahead, management's fourth-quarter outlook--$112
and profitability (operating profit of $6.2 billion, billion-$121 billion in revenue, (representing an increase of
representing operating margins of 6.4%--10.0% excluding 28%-38% year over year) and operating income of $1.0-$4.5
$3.5 billion in COVID-related expenses--versus guidance of billion (representing 2.3% operating margins at the
$2-$5 billion), the natural question investors might be asking midpoint, but also factoring in $4.0 billion in direct and
is how much of wide-moat Amazon's recent momentum is indirect costs COVID-19-related costs, the shift of the lower-
tied to pandemic demand and how much reflects structural margin Prime Day into the fourth quarter, and fulfillment
changes? While certain trends are unlikely to repeat--pantry center expansion costs that were pushed into the fourth
stuffing and fulfillment centers running at elevated capacity, quarter)--strikes us as appropriate on the top line and
for instance--many changes in consumer behavior are likely potentially conservative on the bottom line given the margin
to sustain, giving us confidence in our five-year targets outperformance the past two quarters. That being said,
calling for 22% top line CAGR and 10% operating margins. management did acknowledge that fulfillment capacity
could be "stretched" this holiday season and that earlier
Our conviction comes from several service-related sources. holiday orders could be "advantageous" to both consumers
One, Prime member engagement remains high, with Prime and sellers. We plan to align our model near the high end
member renewal rates improving year over year and of the operating profit outlook for the quarter, but will
subscription revenue per Prime member increasing roughly continue to monitor for any signs of capacity constraints
10% according to our estimates. Two, third-party seller (similar to the holiday season of 2015, where inflated FBA
services revenue also accelerated (55% from 52% last usage by third-party sellers put a strain on fulfillment center
quarter), which not only indicates Amazon's importance as capacity and required additional costs).
a distribution channel, but that sellers are increasingly using Halo Bolsters Amazon's Margin Profile Through New
services like Fulfillment by Amazon (FBA). Three, as Healthcare Subscription and Third-Party Offerings 27
advertising budgets rebound from COVID lows, we expect Aug 2020
Amazon will become an increasingly important partner both The announcement of Amazon Halo--a healthcare
on and off Amazon marketplaces. Four, while demand monitoring subscription service--won't immediately move
remains mixed among some customers in discretionary the needle on our valuation assumptions, but it joins Haven
categories, AWS margins (up 530 basis points to 30.5%) Healthcare (the healthcare joint-venture between Amazon,
reinforces our views existing AWS users are graduating to Berkshire Hathaway, and J.P Morgan) and PillPack as
more value-add services. Lastly, while the firm noted another pillar to wide-moat Amazon's broader healthcare
international profitability is "running ahead of schedule" aspirations while giving us greater conviction in our longer-
because of fulfillment capacity usage, we still see a path term cash flow assumptions.
to mid-single-digit operating margins for many markets
outside the U.S. We see three primary benefits to Amazon Halo. First, the
service--which will cost $99 upfront and $4 per month after

Analyst Notes
six months and includes a wearable Amazon Halo Band-- this a paradigm-shifting update.
unlocks a new service to drive subscription revenue per
Prime member higher, which is key to our longer-term It's hard to pin down the most impressive part of Amazon's
assumptions. We estimate that the average Prime member results. Online sales growth accelerated to 48% from 24%
spent more than $140 in subscription fees the past 12 growth last quarter, driven by new Prime memberships (U.
months, and this service (coupled with other content S. and abroad) and a sharp uptick in sales per existing
services like Amazon Music, Audible, and Amazon member (including online grocery sales, which tripled year
Channels) could help take this metric north of $200 over over year). Third-party seller services also accelerated (52%
time and bolster margins. Second, the service opens the from 30% last quarter), indicating that Amazon is becoming
door to new third-party monetization opportunities. While an even more vital channel of distribution. The international
we don't have the specifics on economics between initial segment posted its first quarter of positive GAAP operating
partnerships with WW, John Hancock Vitality, and Cerner, profit since 2011, with Prime flywheel setting up many
we see the underpinnings of an Amazon Halo third-party markets for accelerating margins. AWS revenue declined
healthcare service marketplace, which should be margin- (29% versus 33% last quarter), but strong segment margins
accretive (much like Amazon's third-party seller (up 580 basis points to 31.1%) confirms that existing
marketplace). In addition, we believe the service could also customers are ramping up value-add services.
potentially allow AWS to upsell its current users (including
Cerner) or target new medical, dental, and veterinary However, operating margins of 6.6% (11% when stripping
Amazon Business customers. Third, we would be surprised out $4 billion in COVID-19-related costs) was the most
if PillPack, Haven, and other services aren't integrated into exceptional number from the update and represents a game
the Halo platform, which could allow the company to changer for profitability. We had been skeptical that double-
develop new Halo pricing tiers and subscription offerings. digit operating margins would be possible for Amazon, and
at the very least, it would take several years to achieve due
There is no change to our $3,500 fair value estimate--which to capacity and other investments. However, third-party
assumes 22% average annual revenue growth and services, subscriptions, AWS, and international scale make
operating margins approaching 10% over the next five this a more palatable medium-term target, with advertising
years--and we see shares as slightly undervalued. and technology licensing (including Zoox) contributing
longer-term.
Consumer Behavior in Coronavirus Unlocks New We raise our five-year average annual revenue outlook to
Revenue/Margin Opportunities for Amazon; FVE to $3,500 22% from 19% and our five-year operating margin target to
31 Jul 2020 10% from 8%. This will bring our fair value estimate to
There was little doubt that Amazon was going to report a $3,500 per share, and we see shares as undervalued.
surge in coronavirus-related sales growth during second
quarter, but the magnitude of the sales outperformance Heading into the quarter, we said that to justify a market
($88.9 billion dollars in revenue, up 40%, versus guidance valuation of $3,000 per share, we'd have to assume at least
of $75-$81 billion) and operating profit upside ($5.8 billion low 20s average annual top-line growth and operating
versus guidance of negative $1.5 billion to $1.5 billion) make margins reaching 10% within the next five years. While we

Analyst Notes
were skeptical at the time due to increased competition AWS, and advertising growing 4%, 22%, 20%, 25%, and
from other retailers, investment requirements, and potential 30%, respectively, over the same period.
regulatory risk, those projections now appear much more
realistic, if not slightly conservative. There are still risks to We forecast a slight decrease in gross margins to 40.7% in
the story, particularly on the regulatory front (though we 2020 (compared with 41.0% in 2019) due to COVID-19-
don't expect immediate action following CEO Jeff Bezos' related expenses, but expect gross margins will improve to
appearance at the July 29 House Judiciary Committee 42.6% over the next five years. Amazon's growing clout with
antitrust hearing), but we believe the broadbased suppliers and advertisers, a higher proportion of third-party
acceleration across Amazon's various services during the units in the sales mix, AWS customer acquisition and
second quarter gives the company several paths to reach greater engagement among existing AWS customers, and
these estimates. advertising service offerings should allow for higher gross
margins. We also forecast operating margin expansion
Management's third-quarter outlook calling for $87.0-$93.0 through increasing expense leverage (particularly in the
billion in revenue and $2.0-$5 billion in operating profit marketing and general & administrative expense line items),
appears realistic, even after factoring in the reopening of contribution from AWS, and accelerating third-party unit
retail locations in many markets, $2 billion in COVID-19- sales. Our model calls for 5.7% GAAP operating margins in
related expenses, and significant fulfillment network 2020 (versus 5.2% last year) but approaching 10% over the
capacity investments (management noted that it plans to next five years, based on its strong competitive positions in
increase its fulfillment square footage by 50% in 2020, AWS and North American e-commerce, as well as early
following an increase in 2019). In addition to the factors that indications of success in certain international markets.
contributed to the impressive second-quarter margin Amazon's Coronavirus-Related Sales Are Surging, but Is
expansion, we believe the company has become even more it Already Reflected in the Market Price? 07 Jul 2020
efficient at its fulfillment centers as it responded to Since bottoming out around $1,600 in mid-March during the
COVID-19-related changes in consumer behavior, making market's early coronavirus fears, wide-moat Amazon's stock
these targets more realistic. has roared back the past several months and closed above
$3,000 per share for the first time on July 6. There are several
For the full year, we now expect revenue growth around reasons to explain the stock's meteoric rise, including
35% (up from our previous expectation of 28%). We've also heightened Prime member engagement (especially for
raised our five-year average annual revenue growth outlook online grocery services), strong AWS usage rates
to 22% from 19% due to greater engagement among (particularly among customers less impacted by COVID-19
Amazon Prime members, increased engagement among disruptions), and a shortage of high-quality growth
third-party sellers, digital content sales, international investments. Amazon is likely to put up impressive growth
expansion (both established and nascent markets), and when it reports second-quarter results in late July, and we
emergent business segments like advertising and expect it to exceed the high-end of its quarterly revenue
technology licensing. With respect to Amazon's sales mix, outlook of $75 billion-81 billion. Based on this near-term
we now forecast online retail revenue to grow 21% annually revenue upside, we're raising our FVE to $2,750 per share
over the next five years, with smaller segments like physical from $2,500. Nevertheless, we believe investors should be
stores, third-party seller services, subscription services, asking whether the current stock price has outpaced

Analyst Notes
Amazon's longer-term cash flow potential?

We forecast gross margins will approach 42%-43% over
Admittedly, betting against Amazon has been a risky the next five years, compared with 41% in 2019. Amazon's
proposition in the past, and we believe the longer-term growing clout with suppliers and advertisers, the higher
positives (international growth potential, AWS upselling proportion of third-party units in the sales mix, increased
potential, expanded advertising services, technology usage and service adoption among AWS customers, and
licensing) still outweigh the negatives (online sales growth new advertising service offerings should allow for higher
from competing mass merchants like Walmart and Target, gross margins. We also forecast operating margin
potential regulatory risk) from an investment story expansion through increasing expense leverage (particularly
perspective. We believe the market has moved back to a in the marketing and general and administrative expense
"growth-over-profitability" mindset with respect to Amazon, line items), contribution from AWS, and accelerating third-
and expect the market to overlook what could be an party unit sales. Our model calls for Amazon to reach 8%
expensive quarter (including at least $4 billion in COVID-19- GAAP operating margins over the next five years, based on
related expenses, which will make it difficult to exceed the its strong competitive positions in AWS and North American
high-end of management's operating profit outlook of $1.5 e-commerce, as well as early indications of success in some
billion). However, to justify the market price of $3,000 we'd international markets.
have to assume at least high 20s average annual top-line
growth and operating margins reaching 10% over the next
five years (compared with high 20s revenue growth and 4%
operating margins over the past three years), which we find
moderately aggressive.
We're planning to raise our full-year revenue growth outlook

to around 28% (up from 26%), but we'll maintain our
operating margin forecast of 4% (versus 5.2% last year).
We're also planning a modest increase in our medium-term
revenue outlook, which will bring our
five-year average annual revenue growth outlook to 19%
from 17% due to greater engagement among Amazon Prime
members, increased third-party sales from its suppliers,
digital content sales, international expansion, and emergent
business segments like advertising and technology
licensing. With respect to Amazon's sales mix, we now
forecast online retail revenue to grow 17% annually over
the next five years, with smaller segments like physical
stores, third-party seller services, subscription services,
AWS, and advertising growing 5%, 19%, 20%, 26%, and
30%, respectively, over the same period.

Morningstar Analyst Forecasts
Financial Summary and Forecasts

Fiscal Year Ends in December Forecast
3-Year 5-Year
Growth (% YoY) Hist. CAGR 2017 2018 2019 2020 2021 Proj. CAGR
Revenue 27.3 30.8 30.9 20.5 36.0 27.9 21.9
EBIT 51.5 -1.9 202.4 17.1 50.0 62.1 37.9
EBITDA 43.5 26.7 78.1 30.9 31.4 45.6 27.4
Net Income 69.7 27.9 232.1 15.0 60.9 44.0 36.9
Diluted EPS 67.4 25.5 228.7 13.8 58.9 43.5 36.7
Earnings Before Interest, after Tax 98.9 94.4 281.9 6.0 44.7 49.1 34.5
Free Cash Flow 35.6 -241.8 -233.1 32.2 79.9 74.3 34.8
3-Year 5-Year
Profitability Hist. Avg 2017 2018 2019 2020 2021 Proj. Avg
Operating Margin % 4.3 2.3 5.3 5.2 5.7 7.2 7.9

EBITDA Margin % 11.2 8.8 11.9 13.0 12.5 14.2 14.6
Net Margin % 3.4 1.7 4.3 4.1 4.9 5.5 6.2
Free Cash Flow Margin % 2.1 -5.4 5.5 6.1 8.0 10.9 9.8
ROIC % 22.1 15.4 26.3 24.6 23.1 33.8 53.0
Adjusted ROIC % 33.1 24.7 40.4 34.2 29.2 41.6 68.0
Return on Assets % 5.2 2.8 6.9 6.0 7.2 8.1 8.9
Return on Equity % 21.0 12.9 28.3 22.0 26.1 28.5 29.8
3-Year 5-Year
Leverage Hist. Avg 2017 2018 2019 2020 2021 Proj. Avg
Debt/Capital 0.37 0.47 0.35 0.27 0.22 0.16 0.14

Total Debt/EBITDA 1.03 1.59 0.85 0.64 0.46 0.30 0.26
EBITDA/Interest Expense 20.21 18.36 19.58 22.71 28.97 40.17 47.75
Valuation Summary and Forecasts Discounted Cash Flow Valuation

2018 2019 2020(E) 2021(E) Firm Value Per Share
USD Mil (%) Value
Price/Fair Value 0.68 0.80 — —
Present Value Stage I 483,103 29.1 956.64
Price/Earnings 74.2 80.3 83.0 57.9
Present Value Stage II 643,036 38.7 1,273.34
EV/EBITDA 26.4 25.8 32.2 22.1
Present Value Stage III 534,926 32.2 1,059.26
EV/EBIT 59.0 64.4 70.4 43.5
Total Firm Value 1,661,065 100.0 3,289.24
Free Cash Flow Yield % 2.6 2.8 2.4 3.9
Dividend Yield % — — — —
Cash and Equivalents 55,021 — 108.95
Debt -23,414 — -46.36
Key Valuation Drivers Preferred Stock — — —
Cost of Equity % 9.0 Other Adjustments — — —
Pre-Tax Cost of Debt % 6.5 Equity Value 1,692,672 — 3,351.83
Weighted Average Cost of Capital % 9.0
Long-Run Tax Rate % 25.0 Projected Diluted Shares 505
Stage II EBI Growth Rate % 8.3
Stage II Investment Rate % -41.3 Fair Value per Share (USD) 3,600.00
Perpetuity Year 20 The data in the table above represent base-case forecasts in the company’s reporting
currency as of the beginning of the current year. Our fair value estimate may differ from the
Additional estimates and scenarios available for download at http://select.morningstar.com. equity value per share shown above due to our time value of money adjustment and in cases
where probability-weighted scenario analysis is performed.

Income Statement (USD Mil)

2017 2018 2019 2020 2021
Revenue 177,866 232,887 280,522 381,593 487,993
Cost of Goods Sold 111,934 139,156 165,536 225,982 285,562

Gross Profit 65,932 93,731 114,986 155,611 202,431
Selling, General & Administrative Expenses 61,610 81,014 100,245 133,310 166,569
Other Operating Expense (Income) 215 297 201 489 513
Other Operating Expense (Income) — — — — —
Depreciation & Amortization (if reported separately) — — — — —
Operating Income (ex charges) 4,107 12,420 14,540 21,812 35,349
Restructuring & Other Cash Charges — — — — —

Impairment Charges (if reported separately) — — — — —
Other Non-Cash (Income)/Charges — — — — —
Operating Income (incl charges) 4,107 12,420 14,540 21,812 35,349
Interest Expense 849 1,418 1,600 1,648 1,730

Interest Income 549 259 1,035 1,850 848
Pre-Tax Income 3,807 11,261 13,975 22,014 34,467
Income Tax Expense 770 1,196 2,373 3,361 7,583
Other After-Tax Cash Gains (Losses) — — — — —

Other After-Tax Non-Cash Gains (Losses) — — — — —
(Minority Interest) -4 8 -14 -3 -25
(Preferred Dividends) — — — — —
Net Income 3,033 10,073 11,588 18,650 26,859
Weighted Average Diluted Shares Outstanding 493 498 504 510 512
Diluted Earnings Per Share 6.15 20.23 23.01 36.57 52.46
Adjusted Net Income 3,033 10,073 11,588 18,650 26,859

Diluted Earnings Per Share (Adjusted) 6.15 20.23 23.01 36.57 52.46
Dividends Per Common Share — — — — —
EBITDA 15,585 27,761 36,329 47,736 69,509

Adjusted EBITDA 15,585 27,761 36,329 47,736 69,509

Balance Sheet (USD Mil)

2017 2018 2019 2020 2021
Cash and Equivalents 20,522 31,750 36,092 58,667 102,885

Investments 10,464 9,500 18,929 25,749 32,929
Accounts Receivable 13,164 16,677 20,816 28,420 36,479
Inventory 16,047 17,174 20,497 27,920 35,202
Deferred Tax Assets (Current) — — — — —
Other Short Term Assets — — — — —
Current Assets 60,197 75,101 96,334 140,756 207,495
Net Property Plant, and Equipment 48,866 61,797 72,705 81,124 76,244
Goodwill 13,350 14,548 14,754 14,754 14,754
Other Intangibles — — — — —
Deferred Tax Assets (Long-Term) — — — — —
Other Long-Term Operating Assets 8,897 11,202 41,455 56,391 72,115
Long-Term Non-Operating Assets — — — — —
Total Assets 131,310 162,648 225,248 293,025 370,608
Accounts Payable 34,616 38,192 47,183 64,257 81,003

Short-Term Debt — — — — —
Deferred Tax Liabilities (Current) — — — — —
Other Short-Term Liabilities 23,267 30,199 40,629 55,267 70,678
Current Liabilities 57,883 68,391 87,812 119,525 151,681
Long-Term Debt 24,743 23,495 23,414 22,107 20,966

Deferred Tax Liabilities (Long-Term) — — — — —
Other Long-Term Operating Liabilities 20,975 27,213 51,962 70,684 90,393
Long-Term Non-Operating Liabilities — — — — —
Total Liabilities 103,601 119,099 163,188 212,316 263,039
Preferred Stock — — — — —
Common Stock 5 5 5 5 5
Additional Paid-in Capital 21,389 26,791 33,658 33,658 33,658
Retained Earnings (Deficit) 8,636 19,625 31,220 49,870 76,728
(Treasury Stock) -1,837 -1,837 -1,837 -1,837 -1,837
Other Equity -484 -1,035 -986 -986 -986
Shareholder's Equity 27,709 43,549 62,060 80,710 107,568
Minority Interest — — — — —
Total Equity 27,709 43,549 62,060 80,710 107,568

Cash Flow (USD Mil)

2017 2018 2019 2020 2021
Net Income 3,033 10,073 11,588 18,653 26,884
Depreciation 11,478 15,341 21,789 25,924 34,160

Amortization — — — — —
Stock-Based Compensation 4,215 5,418 6,864 9,055 11,286
Impairment of Goodwill — — — — —
Impairment of Other Intangibles — — — — —
Deferred Taxes -29 441 796 — —
Other Non-Cash Adjustments -90 493 -85 — —
(Increase) Decrease in Accounts Receivable -4,780 -4,615 -7,681 -7,604 -8,058

(Increase) Decrease in Inventory -3,583 -1,314 -3,278 -7,423 -7,283
Change in Other Short-Term Assets — — — — —
Increase (Decrease) in Accounts Payable 7,100 3,263 8,193 17,074 16,746
Change in Other Short-Term Liabilities 1,021 1,623 328 14,638 15,410
Cash From Operations 18,365 30,723 38,514 70,317 89,145
(Capital Expenditures) -10,058 -11,323 -12,689 -34,343 -29,280

Net (Acquisitions), Asset Sales, and Disposals -13,972 -2,186 -2,461 — —
Net Sales (Purchases) of Investments -3,789 1,140 -9,131 -6,820 -7,180
Other Investing Cash Flows — — — 3,786 3,985
Cash From Investing -27,819 -12,369 -24,281 -37,378 -32,474
Common Stock Issuance (or Repurchase) — — — — —

Common Stock (Dividends) — — — — —
Short-Term Debt Issuance (or Retirement) — — — — —
Long-Term Debt Issuance (or Retirement) 9,860 -7,686 -10,066 -1,307 -1,141
Other Financing Cash Flows — — — -9,058 -11,311
Cash From Financing 9,860 -7,686 -10,066 -10,365 -12,452
Exchange Rates, Discontinued Ops, etc. (net) 713 -351 70 — —

Net Change in Cash 1,119 10,317 4,237 22,575 44,219

Comparable Company Analysis

These companies are chosen by the analyst and the data are shown by nearest calendar year in descending market capitalization order.
Valuation Analysis
Price/Earnings EV/EBITDA Price/Free Cash Flow Price/Book Price/Sales
Price/Fair
Company/Ticker Value 2019 2020(E) 2021(E) 2019 2020(E) 2021(E) 2019 2020(E) 2021(E) 2019 2020(E) 2021(E) 2019 2020(E) 2021(E)
Wayfair Inc W USA 2.85 NM 80.0 158.0 NM 34.4 38.2 NM 42.1 95.9 — — — 0.9 1.7 1.5
Average — 80.0 158.0 — 34.4 38.2 — 42.1 95.9 — — — 0.9 1.7 1.5
Amazon.com Inc AMZN US 0.87 80.3 83.0 57.9 25.8 32.2 22.1 35.6 42.3 25.4 — — — 3.3 4.0 3.1
Returns Analysis
ROIC % Adjusted ROIC % Return on Equity % Return on Assets % Dividend Yield %
Last Historical Year
Total Assets
Company/Ticker (Mil) 2019 2020(E) 2021(E) 2019 2020(E) 2021(E) 2019 2020(E) 2021(E) 2019 2020(E) 2021(E) 2019 2020(E) 2021(E)
Wayfair Inc W USA 2,953 USD -177.4 79.4 88.0 -183.2 82.8 94.9 154.5 32.9 -15.8 -40.7 0.8 -2.8 — — —
Average -177.4 79.4 88.0 -183.2 82.8 94.9 154.5 32.9 -15.8 -40.7 0.8 -2.8 — — —
Amazon.com Inc AMZN US 225,248 USD 24.6 23.1 33.8 34.2 29.2 41.6 22.0 26.1 28.5 6.0 7.2 8.1 — — —
Growth Analysis
Revenue Growth % EBIT Growth % EPS Growth % Free Cash Flow Growth % Dividend/Share Growth %
Revenue
Wayfair Inc W USA 9,127 USD 34.6 50.7 12.2 96.5 -111.7 -200.5 96.6 -138.6 -49.3 234.0 -176.2 -110.7 — — —
Average 34.6 50.7 12.2 96.5 -111.7 -200.5 96.6 -138.6 -49.3 234.0 -176.2 -110.7 — — —
Amazon.com Inc AMZN US 280,522 USD 20.5 36.0 27.9 17.1 50.0 62.1 13.8 58.9 43.5 32.2 79.9 74.3 — — —

Comparable Company Analysis

These companies are chosen by the analyst and the data are shown by nearest calendar year in descending market capitalization order.
Profitability Analysis
Gross Margin % EBITDA Margin % Operating Margin % Net Margin % Free Cash Flow Margin %
Net Income
Wayfair Inc W USA -741 USD 23.5 28.8 27.0 -5.4 5.1 4.1 -10.2 0.8 -0.7 -8.1 2.5 1.2 -5.1 4.1 1.6
Average 23.5 28.8 27.0 -5.4 5.1 4.1 -10.2 0.8 -0.7 -8.1 2.5 1.2 -5.1 4.1 1.6
Amazon.com Inc AMZN US 11,588 USD 41.0 40.8 41.5 13.0 12.5 14.2 5.2 5.7 7.2 4.1 4.9 5.5 9.2 9.4 12.3
Leverage Analysis
Debt/Equity % Debt/Total Cap % EBITDA/Interest Exp. Total Debt/EBITDA Assets/Equity
Total Debt
Wayfair Inc W USA 1,456 USD -154.2 169.6 158.1 284.4 62.9 61.3 — — — -2.9 2.8 3.2 -3.1 5.7 5.6
Average -154.2 169.6 158.1 284.4 62.9 61.3 — — — -2.9 2.8 3.2 -3.1 5.7 5.6
Amazon.com Inc AMZN US 23,414 USD 37.7 27.4 19.5 27.4 21.5 16.3 22.7 29.0 40.2 0.6 0.5 0.3 3.6 3.6 3.4
Liquidity Analysis
Cash per Share Current Ratio Quick Ratio Cash/Short-Term Debt Payout Ratio %
Market Cap
Wayfair Inc W USA 23,660 USD 6.32 33.06 33.49 0.85 2.35 1.83 0.82 2.30 1.79 — — 8.97 — — —
Average 6.32 33.06 33.49 0.85 2.35 1.83 0.82 2.30 1.79 — — 8.97 — — —
Amazon.com Inc AMZN US 1,523,392 USD 71.68 115.03 200.95 1.10 1.18 1.37 0.86 0.94 1.14 — — — — — —
Research Methodology for Valuing Companies
Qualitative Equity Research Overview intangible assets, switching costs, network effect, cost Our model is divided into three distinct stages:
At the heart of our valuation system is a detailed projection advantage, and efficient scale.
of a company's future cash flows, resulting from our Stage I: Explicit Forecast
analysts' research. Analysts create custom industry and Companies with a narrow moat are those we believe In this stage, which can last five to 10 years, analysts
company assumptions to feed income statement, balance are more likely than not to achieve normalized excess make full financial statement forecasts, including items
sheet, and capital investment assumptions into our globally returns for at least the next 10 years. Wide-moat such as revenue, profit margins, tax rates, changes in
standardized, proprietary discounted cash flow, or DCF, companies are those in which we have very high working-capital accounts, and capital spending. Based
modeling templates. We use scenario analysis, in-depth confidence that excess returns will remain for 10 years, on these projections, we calculate earnings before
competitive advantage analysis, and a variety of other with excess returns more likely than not to remain for at interest, after taxes, or EBI, and the net new
analytical tools to augment this process. We believe this least 20 years. The longer a firm generates economic investment, or NNI, to derive our annual free cash flow
bottom-up, long-term, fundamentally based approach profits, the higher its intrinsic value. We believe low- forecast.
allows our analysts to focus on long-term business drivers, quality no-moat companies will see their normalized
which have the greatest valuation impact, rather than short- returns gravitate toward the firm's cost of capital more Stage II: Fade
term market noise. quickly than companies with moats. The second stage of our model is the period it will take
the company's return on new invested capital—the
Morningstar's equity research group (“we," "our") believes To assess the direction of the underlying competitive return on capital of the next dollar invested ("RONIC")—
that a company's intrinsic worth results from the future advantages, analysts perform ongoing assessments of to decline (or rise) to its cost of capital. During the Stage
cash flows it can generate. The Morningstar Rating for the moat trend. A firm's moat trend is positive in cases II period, we use a formula to approximate cash flows in
stocks identifies stocks trading at an uncertainty-adjusted where we think its sources of competitive advantage lieu of explicitly modeling the income statement,
discount or premium to their intrinsic worth—or fair value are growing stronger; stable where we don't anticipate balance sheet, and cash flow statement as we do in
estimate, in Morningstar terminology. Five-star stocks sell changes to competitive advantages over the next Stage I. The length of the second stage depends on the
for the biggest risk-adjusted discount to their fair values several years; or negative when we see signs of strength of the company's economic moat. We forecast
whereas 1-star stocks trade at premiums to their intrinsic deterioration. this period to last anywhere from one year (for
worth. companies with no economic moat) to 10–15 years or
All the moat and moat trend ratings undergo periodic more (for wide-moat companies). During this period,
Four key components drive the Morningstar rating: (1) our review and any changes must be approved by the cash flows are forecast using four assumptions: an
assessment of the firm's economic moat, (2) our estimate of Morningstar Economic Moat Committee, comprised of average growth rate for EBI over the period, a
the stock's fair value, (3) our uncertainty around that fair senior members of Morningstar's equity research normalized investment rate, average return on new
value estimate and (4) the current market price. This department. invested capital, or RONIC, and the number of years
process ultimately culminates in our single-point star rating. until perpetuity, when excess returns cease. The
2. Estimated Fair Value investment rate and return on new invested capital
1. Economic Moat Combining our analysts' financial forecasts with the decline until the perpetuity stage is reached. In the case
The concept of an economic moat plays a vital role not firm's economic moat helps us assess how long returns of firms that do not earn their cost of capital, we
only in our qualitative assessment of a firm's long-term on invested capital are likely to exceed the firm's cost of assume marginal ROICs rise to the firm's cost of capital
investment potential, but also in the actual calculation capital. Returns of firms with a wide economic moat (usually attributable to less reinvestment), and we may
of our fair value estimates. An economic moat is a rating are assumed to fade to the perpetuity period over truncate the second stage.
structural feature that allows a firm to sustain excess a longer period of time than the returns of narrow-moat
profits over a long period of time. We define excess firms, and both will fade slower than no-moat firms, Stage III: Perpetuity
economic profits as returns on invested capital (or ROIC) increasing our estimate of their intrinsic value. Once a company's marginal ROIC hits its cost of capital,
over and above our estimate of a firm's cost of capital, we calculate a continuing value, using a standard
or weighted average cost of capital (or WACC). Without perpetuity formula. At perpetuity, we assume that any
a moat, profits are more susceptible to competition. We growth or decline or investment in the business neither
have identified five sources of economic moats: creates nor destroys value and that any new investment
provides a return in line with estimated WACC.
Morningstar Research Methodology for Valuing Companies Because a dollar earned today is worth more than a
dollar earned tomorrow, we discount our projections of
cash flows in stages I, II, and III to arrive at a total
present value of expected future cash flows. Because we
are modeling free cash flow to the firm—representing cash
available to provide a return to all capital providers—we
discount future cash flows using the WACC, which is a
weighted average of the costs of equity, debt, and preferred
stock (and any other funding sources), using expected
future proportionate long-term market-value weights.
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3. Uncertainty Around That Fair Value Estimate Morningstar Equity Research Star Rating Methodology
Morningstar's Uncertainty Rating captures a range of likely
potential intrinsic values for a company and uses it to
assign the margin of safety required before investing, which
in turn explicitly drives our stock star rating system. The
Uncertainty Rating represents the analysts' ability to bound
the estimated value of the shares in a company around the
fair value estimate, based on the characteristics of the
business underlying the stock, including operating and
financial leverage, sales sensitivity to the overall
economy, product concentration, pricing power, and
other company-specific factors.
Analysts consider at least two scenarios in addition to

their base case: a bull case and a bear case.
Assumptions are chosen such that the analyst believes
there is a 25% probability that the company will perform
better than the bull case, and a 25% probability that the
company will perform worse than the bear case. The
distance between the bull and bear cases is an
important indicator of the uncertainty underlying the
fair value estimate.
Our recommended margin of safety widens as our

uncertainty of the estimated value of the equity
increases. The more uncertain we are about the
estimated value of the equity, the greater the discount
we require relative to our estimate of the value of the
firm before we would recommend the purchase of the Morningstar Star Rating for Stocks QQQQQ We believe appreciation beyond a fair risk-
shares. In addition, the uncertainty rating provides Once we determine the fair value estimate of a stock, we adjusted return is highly likely over a multiyear time frame.
guidance in portfolio construction based on risk compare it with the stock's current market price on a daily The current market price represents an excessively
tolerance. basis, and the star rating is automatically re-calculated at pessimistic outlook, limiting downside risk and maximizing
the market close on every day the market on which the upside potential.
Our uncertainty ratings for our qualitative analysis are stock is listed is open.
low, medium, high, very high, and extreme. Please note, there is no predefined distribution of stars. QQQQ We believe appreciation beyond a fair risk-
That is, the percentage of stocks that earn 5 stars can adjusted return is likely.
× Low–margin of safety for 5-star rating is a 20% discount fluctuate daily, so the star ratings, in the aggregate, can
and for 1-star rating is 25% premium. serve as a gauge of the broader market's valuation. When QQQ Indicates our belief that investors are likely to
× Medium–margin of safety for 5-star rating is a 30% there are many 5-star stocks, the stock market as a whole is receive a fair risk-adjusted return (approximately cost of
discount and for 1-star rating is 35% premium. more undervalued, in our opinion, than when very few equity).
× High–margin of safety for 5-star rating is a 40% discount companies garner our highest rating.
and for 1-star rating is 55% premium. QQ We believe investors are likely to receive a less than
× Very High–margin of safety for 5-star rating is a 50% We expect that if our base-case assumptions are true the fair risk-adjusted return.
discount and for 1-star rating is 75% premium. market price will converge on our fair value estimate over
× Extreme–margin of safety for 5-star rating is a 75% time, generally within three years (although it is impossible Q Indicates a high probability of undesirable risk-adjusted
discount and for 1-star rating is 300% premium. to predict the exact time frame in which market prices may returns from the current market price over a multiyear time
adjust). frame, based on our analysis. The market is pricing in an
4. Market Price excessively optimistic outlook, limiting upside potential and
The market prices used in this analysis and noted in the Our star ratings are guideposts to a broad audience and leaving the investor exposed to Capital loss.
report come from exchange on which the stock is listed, individuals must consider their own specific investment
which we believe is a reliable source. goals, risk tolerance, tax situation, time horizon, income
needs, and complete investment portfolio, among other
For more details about our methodology, please go to factors.
https://shareholders.morningstar.com.
The Morningstar Star Ratings for stocks are defined below:
Other Definitions
Last Price: Price of the stock as of the close of the market

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Morningstar Equity Research

Amazon.com Inc AMZN (NAS) | QQQQ

Coronavirus-Related Consumer Behavior Unlocking New Vital Statistics

Amazon.com Inc AMZN (NAS) | QQQQ

Amazon.com Inc AMZN (NAS) | QQQQ

share gains in the years to come. Despite fulfillment,

One of Amazon's key advantages is the operational

Amazon.com Inc AMZN (NAS) | QQQQ

Amazon.com Inc AMZN (NAS) | QQQQ

to physical store closures.

Amazon.com Inc AMZN (NAS) | QQQQ

Bulls Say/Bears Say

Bulls Say Bears Say

Amazon.com Inc AMZN (NAS) | QQQQ

Risk & Uncertainty

Amazon.com Inc AMZN (NAS) | QQQQ

risk: (1) regulatory, including the threat of increased shipping

Amazon.com Inc AMZN (NAS) | QQQQ

Management & Ownership

Advisor Group Holdings, Inc. 0.03 1.57 -35,259 31 Oct 2020

Amazon.com Inc AMZN (NAS) | QQQQ

Amazon.com Inc AMZN (NAS) | QQQQ

Amazon.com Inc AMZN (NAS) | QQQQ

Amazon.com Inc AMZN (NAS) | QQQQ

Amazon's longer-term cash flow potential?

We're planning to raise our full-year revenue growth outlook

Amazon.com Inc AMZN (NAS) | QQQQ

Morningstar Analyst Forecasts

Financial Summary and Forecasts

Operating Margin % 4.3 2.3 5.3 5.2 5.7 7.2 7.9

Debt/Capital 0.37 0.47 0.35 0.27 0.22 0.16 0.14

Valuation Summary and Forecasts Discounted Cash Flow Valuation

Amazon.com Inc AMZN (NAS) | QQQQ

Morningstar Analyst Forecasts

Income Statement (USD Mil)

Cost of Goods Sold 111,934 139,156 165,536 225,982 285,562

Restructuring & Other Cash Charges — — — — —

Interest Expense 849 1,418 1,600 1,648 1,730

Income Tax Expense 770 1,196 2,373 3,361 7,583

Other After-Tax Cash Gains (Losses) — — — — —

Adjusted Net Income 3,033 10,073 11,588 18,650 26,859

Dividends Per Common Share — — — — —

EBITDA 15,585 27,761 36,329 47,736 69,509

Amazon.com Inc AMZN (NAS) | QQQQ

Morningstar Analyst Forecasts

Balance Sheet (USD Mil)

Cash and Equivalents 20,522 31,750 36,092 58,667 102,885

Accounts Payable 34,616 38,192 47,183 64,257 81,003

Long-Term Debt 24,743 23,495 23,414 22,107 20,966

Amazon.com Inc AMZN (NAS) | QQQQ

Morningstar Analyst Forecasts

Cash Flow (USD Mil)

Net Income 3,033 10,073 11,588 18,653 26,884

Depreciation 11,478 15,341 21,789 25,924 34,160

(Increase) Decrease in Accounts Receivable -4,780 -4,615 -7,681 -7,604 -8,058

(Capital Expenditures) -10,058 -11,323 -12,689 -34,343 -29,280

Common Stock Issuance (or Repurchase) — — — — —

Exchange Rates, Discontinued Ops, etc. (net) 713 -351 70 — —

Amazon.com Inc AMZN (NAS) | QQQQ

Comparable Company Analysis

Amazon.com Inc AMZN (NAS) | QQQQ

Comparable Company Analysis

Analysts consider at least two scenarios in addition to

Our recommended margin of safety widens as our