/Amazon%20Delivery%20Truck.jpg)
Amazon (AMZN) released its Q3 earnings yesterday after the bell, and the stock is popping today, up more than 7% as investors react to better-than-expected revenues and profits. Here are the key takeaways from the report, and why AMZN is still a strong buy.
Amazon reported revenues of $143.1 billion in the third quarter, which was 13% higher than the corresponding quarter last year, and ahead of the $141.4 billion that analysts expected. Revenues were also slightly higher than the top end of Amazon’s guidance.
Revenues for its enterprise-focused Amazon Web Services (AWS) division rose 12% to $23.1 billion, which is the slowest-ever pace since the company started disclosing the revenues separately. This metric also slightly trailed analysts’ estimates. Among Amazon's cloud peers, Alphabet’s (GOOG) most recent quarterly cloud revenues disappointed markets, while Microsoft’s (MSFT) cloud business impressed with its quarterly performance.
Looking at Amazon’s other businesses, Advertising revenues rose 26% to $12.1 billion, and were ahead of the Street expectations. However, the company provided Q4 revenue guidance of $160 billion to $167 billion, with the midpoint of this range arriving below what the Street expected.
Amazon Posted Record Profits in Q3
In Q3, Amazon posted a record net profit of $9.9 billion, thanks to mark-to-market gains on its investment in electric vehicle (EV) startup Rivian (RIVN), where it is the biggest stockholder. However, I won't focus too much on that net income statistic, as - based Rivian’s current stock price - Amazon could end up reporting a big mark-to-market loss in Q4. Amazon posted an operating profit of $11.2 billion in Q4, which is a much better metric to gauge its profitability. In my view, the following stood out in the report:
- The company’s operating margin of 7.8% was the highest since early 2021. Amazon has taken several cost-cutting initiatives that have helped it improve its profits, despite slowing revenue growth.
- Amazon’s International segment approached breakeven on an operating profit basis in Q3.
- AWS reported an operating margin of 30.3%, which is the highest in seven quarters. The company said that the improvement was “primarily driven by increased leverage on our headcount costs."
- In the trailing 12-month period, Amazon’s free cash flows stand at $21.4 billion, as compared to negative $19.7 billion at the end of Q3 2022.
Key Takeaways from Amazon’s Q3 Report
The following are the other key takeaways from Amazon’s Q3 report:
1. Consumers continue to trade down.
Amazon reiterated what other brick-and-mortar retail companies have been saying about consumers in recent months. CFO Brian Olsavsky said during the Q3 earnings call: “From a customer behavior standpoint, we still see customers remaining cautious about price, trading down where they can and seeking out deals, coupled with lower spending on discretionary items."
2. AWS growth is stabilizing.
Amazon reiterated that the AWS segment is stabilizing, echoing its stance from the Q2 earnings call. Olsavsky said, “While optimization still remain a headwind, we've seen the rate of new cost optimization slowdown in AWS, and we are encouraged by the strength of our customer pipeline.”
That said, there are concerns over slowing revenue growth at AWS, as some competitors are reporting much higher growth. However, AWS is the market leader in the cloud industry, and according to Amazon CEO Andy Jassy, the absolute growth – which amounts to $919 million of incremental revenues on a sequential basis – is the highest in the industry, based on the company's estimates.
Jassy is also bullish on artificial intelligence (AI), and believes generative AI “will be tens of billions of dollars of revenue for AWS over the next several years.”
3. Amazon’s advertising business is doing well, despite macro headwinds.
Amazon’s advertising business continues to do well, and is now running at an annualized revenue run rate of almost $50 billion, with revenues consistently rising over 20% YoY. There are some concerns over the health of the advertising market after Meta Platforms (META) sounded circumspect on their Q4 revenue outlook, providing a wider-than-usual guidance range amid “uncertainty.” Meta also alluded to some softness in demand related to the war between Israel and Hamas.
Conversely, Amazon was relatively upbeat about its advertising business. Jassy said, “While we see companies being more cautious on the ad side and the top-of-funnel products, things like display and a little bit of video, we're still seeing a lot of strength in the lower-funnel ad products like sponsored products.”
Amazon Stock Still Looks a Good Buy
I believe that Amazon still looks like a good stock to buy. The company continues to focus on cost cuts and higher efficiencies, and during the earnings call, Jassy said, “We have a long way before being out of ideas to improve cost and speed.” A focus on efficiency would mean that Amazon’s bottom line and cash flows would grow at a faster rate than its sales growth in the coming quarters.
AWS should also see growth rates pick up in 2024, partially aided by a lower base year effect. Amazon is also introducing ads to Prime Video in 2024, while giving consumers an option to pay $2.99 extra per month to keep it ad-free. The move should help support the company’s revenues, as well as profitability. Notably, Prime could be among the most underappreciated assets under Amazon’s umbrella, and Jassy added on the call that “Prime Video can be a large and profitable business in its own right.”
Finally, from a valuation perspective, Amazon trades at a next 12-months price-to-earnings multiple of 45x, which seems reasonable. While the company’s top-line growth has slowed down from the previous years, a focus on profitability makes Amazon stock a compelling buy at these price levels.
On the date of publication, Mohit Oberoi had a position in: AMZN , GOOG , META , MSFT . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
