ii view: cloud growth behind Amazon profits boom

First-quarter results to 31 March 

• Net sales up by 13% to $143.3 billion (£94 billion) year-over-year
• Net income of $10.4 billion (£8.3 billion), up from $3.17 billion a year ago
• Earnings per share of $0.98, up from $0.31

Guidance:

• Expects Q2 sales of between $144 billion and $149 billion, giving year-over-year growth of 7% to 11%

Chief executive Andy Jassy said: 

“It was a good start to the year across the business, and you can see that in both our customer experience improvements and financial results. The combination of companies renewing their infrastructure modernisation efforts and the appeal of AWS’s AI capabilities is reaccelerating AWS’s growth rate.

“Our Stores business continues to expand selection, provide everyday low prices, and accelerate delivery speed (setting another record on speed for Prime customers in Q1) while lowering our cost to serve; and, our Advertising efforts continue to benefit from the growth of our Stores and Prime Video businesses. 

“It’s very early days in all of our businesses and we remain excited by how much more we can make customers’ lives better and easier moving forward.”

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ii round-up:

Retail led conglomerate Amazon.com Inc (NASDAQ:AMZN) has reported soaring profits fuelled by a combination of cost containment and growth at its cloud data hosting and advertising businesses. 

First-quarter sales climbed 13% year-over-year to $143.3 billion, pushing earnings up 216% to $0.98 per share, ahead of Wall Street forecasts of $0.83 per share. Accompanying management forecasts for the current second-quarter pointed to further earnings growth of around 55% year-over-year, but with forecast sales of up to $149 billion coming in marginally shy of existing analyst estimates of $150 billion. 

Shares in the Nasdaq 100 company rose 1% in afterhours trading having come into this latest news up around 15% year-to-date. That’s similar to fellow cloud data hosting company and owner of Google, Alphabet Inc Class A (NASDAQ:GOOGL), and comfortably ahead of a near 4% gain for the Nasdaq 100 index itself. 

Sales at Amazon’s cloud business (Amazon Web Services, or AWS), now potentially hosting AI related software for its customers, climbed 17% year-over-year to $25 billion, up from growth of 13% in the previous fourth quarter and ahead of analyst estimates of $24.5 billion. 

Advertising related revenues and aided by its Prime TV streaming service climbed by almost a quarter year-over-year to $11.8 billion, exceeding estimates of $11.7 billion.

Its international retailing business away from its home US market detailed a move back into a profit of $0.9 billion compared to a loss of $1.2 billion in early 2023, aided by a bearing down on costs following a period of over investment during the pandemic.

Capital expenditure for the current financial year is expected by Wall Street to come in at around $70 billion. About $50 billion of that is expected to help growth of its cloud data hosting division AWS, potentially buying NVIDIA Corp (NASDAQ:NVDA) chips given the wider push towards AI. 

Broker Morgan Stanley reiterated its ‘overweight’ stance on the shares post the results, highlighting them as a ‘top pick’.  

ii view:

Started in 1994, Amazon today still generates about two-thirds of its revenue from online retailing, but with AWS now accounting for 16% and advertising at 8%. Subscriptions and physical stores account for most of the balance. Geographically, the US remained dominant at almost 70% of sales in 2023, with Germany, the UK and Japan all notable at around 5-6% and other countries accounting for the rest.

For investors, the tough economic backdrop including heightened borrowing costs now overshadow future potential consumer and corporate spending. Competition in its various areas of interest such as streaming from Netflix Inc (NASDAQ:NFLX) and The Walt Disney Co (NYSE:DIS) and cloud data provision from Microsoft Corp (NASDAQ:MSFT), is intense. Questions regarding appropriate valuations for tech companies continue to be asked, while government concerns about monopolistic powers have not gone away. 

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On the upside, cost cuts given an arguable overspend during the pandemic are now shining through. Its core retail business is today accompanied by significant other operations, with its cloud computing AWS business now a major global force in its own right. Potential for its ongoing AI investments warrant consideration, while the current estimated price/earnings (PE) ratio below the three-year average suggests the shares are not obviously expensive on a historical basis. 

On balance and despite ongoing risks, Amazon remains a popular stock to own and is heavily backed by Wall Street analysts. A consensus analyst fair value estimate currently exceeds $210 per share.

Positives

• Dominant position in online retailing
• Pushing AI initiatives and investments

Negatives

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

The average rating of stock market analysts:

Buy