ii view: Amazon cloud business casts a shadow

Last year was a tough one for investors in this tech titan, but cost savings are being made and investment in AI pursued. Buy, sell, or hold?

First-quarter results to 31 March 

• Net sales up by 9% to $127.4 billion (£102 billion) year-over-year
• Net income of $3.2 billion (£2.56 billion), up from a loss of $3.8 billion a year ago 

Guidance:

• Expects Q2 sales of between $127 billion and $133 billion, giving year-over-year growth of 5% to 10%

Chief executive Andy Jassy said: 

“There’s a lot to like about how our teams are delivering for customers, particularly amidst an uncertain economy. Our Stores business is continuing to improve the cost to serve in our fulfilment network while increasing the speed with which we get products into the hands of customers.”

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ii round-up:

Retail tech titan Amazon.com Inc (NASDAQ:AMZN) reported sales which beat Wall Street hopes but cautioned in relation to its Cloud data business as corporations proved more frugal given the backdrop of an economic slowdown. 

Overall sales for the first quarter to the end of March rose 9% year-over-year to $127.4 billion beating analyst forecasts nearer to $125 billion, but with growth in cloud sales slowing to 16% from the previous quarter’s 20%. 

Shares in the Nasdaq 100 company eventually fell by around 2% in afterhours US trading having come into this latest news up around 30% year-to-date, but down 50% during 2022. That’s similar to fellow cloud data provider and Google owner Alphabet Inc Class A (NASDAQ:GOOGL). The Nasdaq 100 index itself is up around 20% in 2023 as investors continue to hope that interest rates may have peaked. 

Cloud data sales at Amazon Web Services (AWS) grew to $21.3 billion during the quarter, with operating income dropping to $5.5 billion compared to $6.5 billion in the year ago quarter. 

Sales for its advertising business helped compensate for some of the disappoint at AWS, rising 23% year-over-year to $9.51 and against forecasts nearer to $9.1 billion and aided according to management by its investments in Artificial Intelligence or AI. 

Like fellow tech companies, Amazon has in recent months announced a series of job losses including at AWS as it looks to trim costs and improve efficiency, given slowing economic growth following a jump in global interest rates. 

Overall sales for the current second quarter are forecast by management to come in at between $127 billion and $133 billion, potentially flat against the $127.4 billion just reported. 

Broker Morgan Stanley reiterated its ‘overweight’ stance on the shares post the results, highlighting the potential long-term push from the company’s AI investments. 

ii view:

Started in 1994, Amazon today is focused on e-commerce, cloud computing, digital streaming, online advertising, and artificial intelligence. Its cloud business AWS competes with the likes of Microsoft Corp (NASDAQ:MSFT) and International Business Machines Corp (NYSE:IBM). Its streaming business Prime rival’s offerings from Netflix Inc (NASDAQ:NFLX) and The Walt Disney Co (NYSE:DIS). Devices such as its Fire tablet offer competition to Apple Inc (NASDAQ:AAPL) tablets while its advertising sales compete with the likes of Meta Platforms Inc Class A (NASDAQ:META) for corporate and consumer attention. 

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For investors, the tough economic backdrop for consumers globally continues to overhang potential future spending. Some over investment during the pandemic is now being reined in, costs generally for businesses remain elevated, while government concerns regarding monopolistic powers persist. 

On the upside, Amazon's core retail business is now accompanied by significant other businesses, all of which enjoy wide geographical diversity. Initiatives to cull costs and improve efficiency are being executed, while its previous increase in Prime membership fees should help counter elevated costs. 

On balance, and while some caution remains sensible, an analyst consensus estimate of fair value at over $135 per share is likely to leave long-term fans staying patient. 

Positives

• Dominant position in online retailing
• The Amazon Web Services (AWS) business is now a major global player

Negatives

• The threat of increased regulation across many of its markets
• Currency movements can hinder performance

The average rating of stock market analysts:

Buy