After the U.S. stock market on Tuesday, April 30, Amazon, a technology giant that vigorously promotes e-commerce and cloud services around the world and actively participates in the "AI arms race", released its financial report for the first quarter of 2024.
Amazon's first quarter report is generally good, some analysts say that its total revenue growth rate is the fastest in a year, AWS cloud revenue accelerated for the second consecutive quarter, and the operating margin of the business hit a record high, but the second quarter revenue and operating profit guidance was slightly worse than expected, and the revenue growth rate in the second quarter may be the slowest since December 2022, and it did not follow Meta and Google to announce the first dividend in history, which made the stock price jump 6% after the after-hours increase significantly narrowed.
Amazon plunged and closed down 3.3% in late trading on Tuesday, off a two-week high, up 15% so far this year, significantly outperforming the S&P's 5.6% gain, the Nasdaq's 4% gain, and the Dow, which was added as a component in February, was largely flat. Over the past 12 months, Amazon has risen more than 71%, but it has fallen more than 7% from its all-time closing high of $189.05 set on April 11 for the first time in two years.
As a cutting-edge leader in artificial intelligence, Amazon is popular with investors who are bullish on large-cap technology stocks, with a total of 42 analysts covering its research reports in the past three months, all of which have buy ratings, and an average price target of $213.74 represents a 22% upside. Wall Street believes that the company's AI-powered cloud computing, e-commerce and advertising revenues, as well as profit margins, will all accelerate growth.
Amazon's revenue increased by more than 12% in the first quarter, profits tripled, and AWS's annual sales are expected to reach $100 billion
According to the financial report, Amazon's first-quarter revenue increased by 12.5% to $143.31 billion from $127.4 billion in the same period last year, higher than the $142.6 billion expected by analysts and the fastest growth rate in a year, and adjusted earnings per share EPS reached $0.98, higher than the expected $0.83, more than three times or 216% year-on-year increase of $0.31 in the same period last year.
However, revenue and EPS were weaker sequentially than the $169.96 billion and $1 earnings per share in the fourth quarter of last year, respectively. At that time, Amazon's revenue increased 14% year-over-year, and EPS jumped sharply from $0.03 per share in the fourth quarter of 2022.
First-quarter operating profit also tripled or rose 219% year-on-year to $15.3 billion from $4.8 billion a year earlier, above expectations of $11.2 billion and unexpectedly beating $13.2 billion in the fourth quarter of last year. Net income in the first quarter rose 225% from $3.17 billion a year ago to $10.4 billion, above expectations of $8.9 billion and weaker than a two-year high of $10.62 billion in the fourth quarter of last year.
The company said net profit for the first quarter of 2024 included a $2 billion pre-tax valuation loss from an investment in the common stock of electric truck start-up Rivian, a "Tesla rival," a significant deepening from a similar pretax valuation loss of $500 million in the first quarter of last year.
Some analysts said that the rise in operating profit far outpaced revenue growth, which is the latest sign that cost cuts and a focus on efficiency are boosting its earnings. Since the end of 2022, Amazon has laid off more than 27,000 employees, and in the first quarter of this year, it also laid off hundreds of employees at Health and AWS.
In terms of performance guidance, Amazon expects second-quarter net sales to be between $144 billion and $149 billion, equivalent to a year-on-year increase of 7% to 11%, but the market expects revenue to break through the $150 billion mark or increase another 12%, and operating profit is expected to be between $10 billion and $14 billion, an increase of at least 30% from $7.7 billion in the same period last year, but slightly below the market expectation of $12.56 billion.
According to financial blog Zerohedge, this means that Amazon's revenue growth in the second quarter will be the slowest since December 2022.
Andy Jassy, Amazon's president and chief executive, said that the renewed investment in infrastructure modernization by many enterprises, combined with the appeal of AWS's artificial intelligence capabilities, is re-accelerating AWS's growth rate, which is expected to reach the $100 billion mark in annual revenue at the current rate. The advertising business has also benefited from the growth of stores and Prime Video, and "all of our businesses are still in the early stages", suggesting that there is a lot of potential for the future.
Cloud revenue accelerated for the second consecutive quarter and operating margins reached record highs, advertising increased 24% year-over-year, and there was still no dividend
In terms of business, core e-commerce sales in the first quarter increased 7% to US$54.67 billion from US$51.1 billion in the same period last year, advertising revenue increased 24% to US$11.8 billion from US$9.5 billion in the same period last year, all in line with market expectations, and cloud business AWS revenue increased nearly 17% from US$21.4 billion in the same period last year to US$25 billion, exceeding expectations of US$24.5 billion.
In the fourth quarter of last year, Amazon Ads revenue increased by 27% year-on-year to $14.654 billion, accelerating growth for the fifth consecutive quarter, while AWS revenue increased by 13% year-on-year to $24.204 billion, and AWS's operating margin in 2023 is as high as 27%.
This represents the second consecutive quarter of accelerated growth in Amazon's AWS cloud revenue in the first quarter, indicating that the cloud business is improving, in line with the cloud revenue acceleration trend in the first quarterly report of competitors Microsoft and Google, which increased cloud revenue by 23% and 28% respectively in the quarter. In the third quarter of last year, AWS's revenue growth ended a six-quarter slowdown and returned to accelerated expansion for the first time since the fourth quarter of 2021.
The demand for generative AI tools and services is driving business growth across all cloud providers. AWS's operating margin of 37.6% in the first quarter of this year hit a record high, up from 30.3% and 29.6% in the third and fourth quarters of last year, returning to normal after three consecutive quarters of year-over-year declines that began in late 2022.
AWS reported an operating profit of $9.4 billion in the first quarter, far beating expectations of $7.5 billion, an increase of 84% year-over-year, and accounting for 61.4% of total operating profit. Most of Amazon's revenue comes from its core business, e-commerce, but cloud computing AWS and advertising contribute most of the profits. At the same time, the international business has rarely turned a profit, with an operating loss of more than $400 million in the fourth quarter of last year and a loss of $1.2 billion in the first quarter of last year.
According to other analysts, the advertising business has been Amazon's fastest-growing revenue segment for several consecutive quarters, and the company first began selling ads on Prime Video subscription streaming services in January this year, which will help increase profits. Previously, most of Amazon's advertising revenue came from the sale of ad placements on the e-commerce marketplace platform.
In addition, revenue from third-party seller services, including commissions, fulfillment fees, shipping and other fees charged by Amazon, continued to surge, with revenue in the first quarter rising 16% year-over-year to $34.5 billion, but slightly worse than the market expectation of $34.63 billion.
Amazon did not announce the first dividend in the company's history, following Meta and Google. Amazon is the last big tech company that has yet to pay dividends to shareholders.
What are you most concerned about?Artificial intelligence, advertising, profits, whether or not to pay a first dividend
Analysts will focus on whether Amazon's advertising and cloud computing businesses, the main drivers of Amazon's margins, can withstand the challenges of slowing spending and continue to grow, as well as the company's capital expenditure trends in investing in artificial intelligence, which will impact free cash flow.
Amazon has said that its goal for 2024 is to improve efficiency and profitability, and its strategic investment in warehouse robotic automation is also worth watching, with more than 750,000 robots currently deployed in fulfillment centers, which has driven the increase in fulfillment costs lower than the increase in overall revenue. The CEO pledged to further cut costs related to Amazon's internal fulfillment structure and inventory allocation this year.
Meta's double-digit plunge after sharply raising its capital expenditure forecast for this year indicates that investors are beginning to be impatient with heavy AI investments for years to come.
Cloud providers, led by Amazon, are investing heavily to expand AI capabilities, including the purchase of advanced chips and the construction of new data centers. Both Microsoft and Google have said they are investing more in AI data centers.
Amazon positions itself as an AI leader and looks ahead to tens of billions of dollars in potential revenue for its cloud business. CEO Andy Jassy bluntly stated in a letter to shareholders released in April: "Generative AI is probably the biggest technological change since the cloud (itself is still in its early stages), and even since the internet." ”
Wall Street is also concerned about whether Amazon can continue to improve the profitability of its huge retail business, the impact of recent price increases on third-party sellers, whether the launch of advertising on Prime Video is expected to bring in billions of dollars in additional revenue, and whether it will continue to lay off employees to increase efficiency. Jassy said he believes Prime Video will grow into a large and profitable business on its own, and that streaming advertising is growing rapidly and getting off to a good start.
Currently, Amazon AWS ranks first with about 30% of the cloud market share, followed by Microsoft Azure and Google Cloud. Amazon's advertising business ranks third with a market share of nearly 15%, behind longtime digital advertising leaders Google and Meta. At the same time, the retail industry in the United States is becoming increasingly competitive, and Chinese e-commerce companies Temu and Shein pose a significant threat to Amazon's profits.
In addition, following the dividend announcements of Meta and Google this year, the market is highly concerned about whether Amazon will also pay its first dividend, and Amazon is the last big tech company to pay dividends to shareholders yet. And Amazon hasn't moved since it spent $3.3 billion on stock buybacks in June 2022, and any updates could be a strong boost to the stock price.
Some analysts say that the payment of dividends is not only a sign of a company's maturity, but also an effective distraction from investors' attention to huge capital expenditures. Paying dividends often means that a company's years of high growth are over, but the AI business may break this pattern.
However, New Street Research believes that Amazon is unlikely to pay dividends and instead play on the remaining $6.1 billion in share repurchase authorizations, while funding AI will make the company's capital expenditure higher than the consensus expects.
What do you think of Wall Street?
Last September, Amazon launched the Amazon Bedrock AI service, which allows customers to build generative AI applications using existing large language models from Anthropic, Stability AI, and Amazon. In March, Amazon invested an additional $2.75 billion in artificial intelligence startup Anthropic, bringing the total investment to $4 billion. The company is also laying off employees in its slowing AWS division, ending the cashierless checkout system of Amazon Fresh, a fresh grocery supermarket in the U.S., and launching a new grocery delivery subscription service.
Evercore ISI sees significant growth potential for advertising on Prime Video starting in January, with Amazon's vast resources, vast consumer data, and Prime Video's broad reach likely to drive the expansion of the new ad platform.
UBS pointed out that as AWS's revenue becomes more stable, investors' focus has expanded to the retail market platform business and operating profits, "rather than focusing more narrowly only on AWS growth", and it is expected that AI-assisted and same-day speed delivery will accelerate the development of Amazon's e-commerce business. Amazon said this week that it had set a new record for the delivery speed of Prime members in the first three months of this year, breaking the record high for 2023.
Goldman Sachs said that the resilience of retail demand, as well as the expected growth in AWS and advertising revenue, made Amazon the "top choice" for e-commerce stocks, otherwise Goldman Sachs would have been cautious about e-commerce stocks as a whole due to a series of headwinds facing the industry. Bank of America also cited expanding retail margins, positive developments in AWS and advertising revenue as the main drivers for Amazon's stock price.
Wells Fargo believes that 2024 will be a year of cyclical recovery, and enterprise AI may be more focused on in 2025/2026. Needham said Amazon will be among the 2-3 biggest winners of the AI race, and that it is developing custom generative AI chips that could be a huge catalyst for the stock price in the coming years, but weak consumer demand and increased competition are the main risks.
Wedbush believes generative AI cloud services will generate tens of billions of dollars in incremental revenue for Amazon in the coming years, "AWS remains a major beneficiary of generative AI and is well-positioned for all tiers of solutions," and nearly all advertisers surveyed intend to increase Amazon's advertising budgets once Prime Video ads are likely to generate about $6.5 billion in revenue once they roll out globally.
According to Jefferies, Amazon has entered "harvest mode" in terms of cost reduction, and faces opportunities for profit expansion in the coming years, thanks to a continued focus on improving efficiency across business units, as well as accelerated growth in the highest-margin businesses, AWS and advertising.
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