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Amazon crushed e-commerce and cloud and forecast a strong holiday quarter

Vaseline November 1, 2024

Amazon reported a much better-than-expected third quarter on Thursday, with strong growth in online sales, cloud operations and advertising. Margin initiatives lead to increasing profits. Moreover, the fourth quarter forecast was exactly what was needed to keep investors happy. Revenue rose 11% year over year to $158.88 billion, beating expectations of $157.2 billion, according to LSEG estimates. Earnings per share based on generally accepted accounting principles (GAAP) rose to $1.43, up from 94 cents last year and the estimate of $1.14. Operating income rose 56% last year to $17.41 billion, an improvement over the consensus forecast of $14.7 billion. Amazon Why we own it: Amazon may be widely known for online shopping, but its cloud business is also a breadwinner. Advertising is another fast-growing, high-margin business. Management has been working to aggressively reduce delivery times and reduce overall costs. Prime uses free shipping and video streaming with a host of other benefits to keep users paying every month. Competitors: Walmart, Target, Microsoft and Alphabet Most recent purchase date: August 12, 2024 Started: February 2018 In short Both sales and operating results exceeded management’s high expectations in August. At the time, the stock fell nearly 9% to around $168, responding to guidance that fell short of Street estimates. In defense of the sell-off at the time, we noted how difficult it is for a company of Amazon’s size to determine sales in advance. That’s why management has a track record of steering conservatively and delivering results at the high end or above the target range. In August, we also said that selling pressure was becoming excessive as its profitability story was still intact due to efficiency gains in its AWS cloud division and the identification of more ways to reduce costs to serve its retail customers. That’s what happened this time as the North American and International businesses each delivered year-over-year operating margin improvements for the seventh consecutive quarter. This is the story. The nearly $3 billion increase in operating income and strong fourth-quarter guidance prove the company is focused on increasing margins. To be sure, the company is spending aggressively on capital expenditures this year and will spend even more in 2025, a trend that has affected other mega-cap tech companies. However, the market appears to be giving Amazon a chance as sales perform better and margins rise. AMZN YTD stocks Amazon’s stock performance this year. We reiterate our 1 rating and raise our price target from $220 to $240, implying an upside of nearly 29% from Thursday’s closing price of $186.40. Amazon shares rose 5.5% in extended trading after the release, a gain that would more than offset the more than 3% decline during the regular session. Commentary Cloud unit Amazon Web Services (AWS) third-quarter revenue was broadly in line with consensus forecast. Constant currency growth remained stable at 19% from the second quarter, ending the three-quarter streak of accelerating sales growth. “I believe we have more demand that we could meet if we had even more capacity today,” said CEO Andy Jassy, referring to cloud demand. What stood out this quarter was the continued increase in AWS’s operating margin. The cloud sector, with an annual turnover of $110 billion, is now printing money. Operating margins increased 780 basis points from last year and 256 basis points from the second quarter to approximately 38%, well above estimates. As we indicated last quarter, some of the margin gain is due to the impact of a favorable accounting change. That contribution was approximately 200 basis points. But the company has also focused on cost control, such as slowing the hiring process, unlocking efficiencies in infrastructure and cutting costs across the company. Accelerating revenue demand also helps. Within AWS, the artificial intelligence division now has multi-billion dollar revenues, growing at a triple-digit rate year-over-year. Jassy said that AI is “growing more than three times as fast at this stage of its evolution, while AWS itself was growing. And we felt like AWS was growing quite quickly.” Quarterly results As with the rest of the company, Amazon recorded sales figures in online stores (7% sales growth), subscription services (11% sales growth) and advertising services (19% sales growth). Smaller companies such as Physical Stores (5% sales growth) and Other (7% sales growth) also performed better than expected. Third Party Seller Services (10% revenue growth) missed for the third quarter in a row. In North America, sales increased by 9% and operating margins improved to almost 6%. One of the reasons the company has done a great job of increasing margins is by lowering the costs of serving its online customers. This has been one of management’s biggest ventures and has led to huge earnings gains. But the work is never done. During the earnings call, Jassy mentioned three initiatives the company is working on that he believes will have a meaningful long-term impact. First, Jassy thinks there are more gains to be made on top of what has already been done with Amazon’s regionalization initiative and bringing items closer to customers. Second, he wants more same-day delivery facilities. Not only is this the fastest way to get goods to shoppers, but Jassy says it’s also one of the cheapest ways to deliver. Third, Amazon is innovating in robotics to speed delivery, reduce service costs and improve safety. “We have about five or six very important new robotics capabilities in the areas of warehousing, picking, packaging and shipping, which we ultimately put into one facility to handle the entire workflow,” Jassy explains. These three initiators were similar to what we learned during the second quarter earnings call, but it’s still important to remember because lowering service costs is key to Amazon’s profitability story. In the international segment, Amazon has now made a profit every quarter this year. The strength comes from established countries such as Great Britain and Germany. Management also cited efficiency in the transportation network and better execution in fulfillment centers as reasons behind the margin gains. Advertising revenue is also a major contributor. On capital expenditures, Amazon spent $21.4 billion in the third quarter, bringing its year-to-date total to $51.9 billion. The company expects to spend $75 billion in 2024, well above the consensus forecast of $66.5 billion. The majority of these investments will support demand for AI services, technology infrastructure, and fulfillment and transportation networks. Project Kuiper was not discussed during the earnings call. That’s Amazon’s emerging satellite internet business. Kuiper’s costs were partly responsible for squeezing margins in Amazon’s North American segment in the second quarter. Guidance Amazon’s core holiday season guide for the fourth quarter was solid. The company expects net sales of $181.5 billion to $188.5 billion, up 7% to 11% year over year. The top end of the forecast reflects the consensus estimate of $186.3 billion, but the midpoint of $185 billion was a narrow miss. The operating profit forecast shows good momentum in profitability. Management expects operating income of $16 billion to $20 billion, beating the consensus estimate of $17.33 billion at a midpoint of $18 billion. (Jim Cramer’s Charitable Trust is long AMZN. See here for a full list of the stocks.) As a CNBC Investing Club subscriber with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charity’s portfolio. If Jim has talked about a stock on CNBC TV, he will wait 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, ALONG WITH OUR DISCLAIMER. No fiduciary obligation or duty exists nor is it created by your receipt of any information provided in connection with the Investment Club. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Amazon packages are prepared for delivery at Amazon’s Robotic Fulfillment Center on December 19, 2023 in Sutton Coldfield, England.

Nathan Stirk | Getty Images News | Getty Images

Amazon reported a much better-than-expected third quarter on Thursday, with strong growth in online sales, cloud activities and advertising. Margin initiatives lead to increasing profits. Moreover, the fourth quarter forecast was exactly what was needed to keep investors happy.

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Amazon crushed e-commerce and cloud and forecast a strong holiday quarter

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Amazon crushed e-commerce and cloud and forecast a strong holiday quarter

Vaseline

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