Morningstar Analyst Explains Why Amazon's Shares Will Continue To Move Higher

Shares of e-commerce giant Amazon.com, Inc. AMZN are up more than 20 percent year-to-date, and analysts believe that it still has room to run. R.J. Hottovy, analyst at Morningstar, was on CNBC Wednesday to talk about what will continue to drive Amazon shares higher.

Are Fulfilment Centers Amazon’s Trump Card?

“Yeah, I think that’s a key thing we have seen in the last two holiday seasons. Lots of retailers have put their emphasis on price matching when Amazon has still been taking share from a lot of these retailers,” Hottovy said.

“And to us, that suggests that the purchase decision for a lot of consumers have shifted away from solely pricing to expedited shipping. That’s also become a very key consideration.

“Looking at Amazon’s fulfilment centers, the technology they have there – the same and next day delivery capabilities; as well as these sortation centers the company has been building, which are placed on the outskirts of major urban markets facilitate expedited shipping and bypass the traditional parcel service. I think that puts them in a very strong competitive advantage across an even wider number of products than any traditional retailer can match.”

Related Link: Big Names Expanding Delivery Services Soon

Outlook of >4 Percent Operating Margins by 2019

When asked about the analyst note that suggested that Amazon could exceed a 4 percent operating margin by 2019, Hottovy described what was driving this particular outlook.

“There’s really three building blocks behind that. One is starting point: Amazon Prime,” Hottovy replied. “I think, if you look at the membership fees that go along with that as well as incremental revenues that comes in and also parse out the incremental costs that are tied to Amazon Prime, we find that it’s actually a very profitable business. Right now we feel that with most Prime members you are making back that membership fee that $99 membership fee in actual operating profit.”

He continued, “Unfortunately, some of that profits is masked by other investments in their business, whether it be technology, content or fulfilment centers at this point. But as the company acquires more and more Prime members – and we estimate today that there are about 35 million members globally and that number is going to continue to go up with a lot of the creative partnerships they have in that – we feel that not only is that potential margin accretive, but also blocks out potential competitors.”