Why Amazon Stock Is Morningstar’s Top Pick
Financial research firm Morningstar is bullish on Amazon's (AMZN) - Get Free Report stock. According to analyst Dan Romanoff, the e-commerce titan's strength is in its wide economic moat. This helps the company offer a great variety of goods and services for affordable prices.
However, Romanoff recently warned about the risks that could threaten the Seattle-based titan's market position.
Figure 1: Why Amazon Stock Is Morningstar’s Top Pick
Dave Sanders for The New York Times
(Read more from the Amazon Maven: Amazon's Acquisition Spree: 3 Sectors the Company Could be Aiming For)
Too Big to Fail
According to Romanoff, Amazon’s e-commerce competitive advantage is its size and scale. The company can offer the vastest product catalog possible for the most affordable prices.
The result is a market share gain projection in a highly growing market — according to Statista, the U.S. e-commerce space will nearly double in size from 2021 to 2025.
As a result, Amazon created an economic moat based on “network effects, cost advantages, intangible assets, and switching costs,” said Romanoff.
Add to that Amazon’s own logistics network, multiple benefits to Prime membership, and the Amazon Web Services (AWS) revenue stream, and we are left with a “powerful virtuous circle in which customers and sellers attract one another” — something traditional retailers have been unable to compete with.
“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. We believe this will result in economic returns well in excess of its cost of capital for years to come,” Romanoff wrote.
The Higher the Reward, the Higher the Risk
Despite Morningstar’s bullishness, the firm’s Uncertainty Rating for Amazon is high.
Romanoff wrote that he believes the company’s leadership position in the retail segment is challenging to maintain. That's due to many factors beyond Amazon’s control, such as consumer preferences and the further penetration of traditional retailers in the e-commerce space.
Still, the analyst acknowledged that the intrinsic fragility of the e-commerce market is what pushed Amazon into investing in “nontraditional areas” in order to both secure its dominance and create new revenue streams.
“Some of these investment areas have raised investor questions in the past, but we expect management to continue to invest according to its strategy, despite periodic margin pressure from increased spending,” Romanoff concluded.
Bulls vs. Bears
Amazon is the kind of company that pushes its limits in order to maximize its growth. That is the opposite of a “safe” investment, which catches the eyes of both bulls and bears.
The bulls believe Amazon will remain the leader of the e-commerce and cloud industries, as the cash-cow AWS and the high-growing advertising segment will guarantee the company’s margins, while Prime memberships enhance customer experience.
The bears can hardly deny Amazon’s strengths, but they are skeptical of the costs. Creating and maintaining a fulfillment network, investing in new projects, and acquiring new companies — such as the recent plans to buy One Medical (ONEM) - Get Free Report and iRobot (IRBT) - Get Free Report — are indeed depleting the company’s free cash flow.
Also, regulatory issues are still a matter of concern.
In the end, Romanoff sides with the bulls. The analyst gave Amazon's stock Morningstar’s Top Pick status, pricing shares at $192 apiece.
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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting the Amazon Maven)
