ii view: Amazon earnings blow past Wall Street estimates

Third-quarter results to 30 September 

• Net sales up by 13% to $143.1 billion (£117.3 billion) year-over-year
• Net income of $9.9 billion (£8.1 billion), up from $2.9 billion a year ago
• Earnings per share of $0.94, up from $0.28

Guidance:

• Expects Q3 sales of between $160 billion and $167 billion, giving year-over-year growth of 7% to 12%

Chief executive Andy Jassy said: “We had a strong third quarter as our cost to serve and speed of delivery in our Stores business took another step forward, our AWS (Amazon Web Services) growth continued to stabilise, our Advertising revenue grew robustly, and overall operating income and free cash flow rose significantly.”

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ii round-up:

Retail mammoth Amazon.com Inc (NASDAQ:AMZN) detailed sales and earnings which beat Wall Street forecasts with accompanying management comments pointing to a recent pick-up in business wins for its cloud data-hosting business AWS. 

Aided by cost savings and a $1.2 billion valuation gain on its electric car investment Rivian Automotive Inc Class A (NASDAQ:RIVN), earnings of 94 US cents comfortably beat forecasts nearer to $60 cents per share.

Amazon shares rose by 5% in after-hours US trading having come into this latest news up by around 40% year-to-date. That’s similar to fellow cloud data business owners Microsoft Corp (NASDAQ:MSFT) and Alphabet Inc Class A (NASDAQ:GOOGL), although a long way behind a 175% gain for advanced computer chip maker and AI specialist NVIDIA Corp (NASDAQ:NVDA. 

Sales for Amazon’s cloud business, now potentially hosting artificial intelligence-related software for its customers, rose 12% year-over-year to $23.1 billion. That’s below gains of around a fifth for rivals Microsoft and Google owner Alphabet. 

Core Amazon retail revenues climbed 7% during the quarter, beating a 4% improvement in the prior second quarter. Advertising-related sales increased by around quarter, beating recent gains for rivals such as Alphabet and Meta Platforms Inc Class A (NASDAQ:META). 

Like fellow tech companies, Amazon earlier this year announced a series of job losses as it looked to trim costs and improve efficiency given more challenging economic growth following a jump in global interest rates. 

Broker Morgan Stanley reiterated its “overweight” stance on the shares post the results, highlighting the shares as a “top pick”.

ii view:

Amazon’s online store generates its biggest slug of sales at around 43%, followed by third-parry seller services at around 23%. Its cloud business AWS comes next at 15%, followed by both advertising and subscription services at around 7% each, and its physical stores the balance of 4%. Geographically, the US remains dominant at almost 70% of sales, with Germany, the UK and Japan all notable at around 5% to 6% and other countries accounting for the rest. 

For investors, the tough economic backdrop including heightened borrowing costs now overshadows future potential consumer and corporate spending. Competition in its various arenas such as streaming from the likes of Netflix Inc (NASDAQ:NFLX) and The Walt Disney Co (NYSE:DIS) is intense. Costs generally for businesses remain elevated, while government concerns for monopolistic powers have not gone away. 

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On the upside, cost cuts following an arguable overspend during the pandemic are now shining through. Its core retail business is today accompanied by significant other businesses, with its cloud computing AWS business now a major global force in its own right. Potential for its ongoing AI investments warrants consideration, while a price to net asset value comfortably below the three-year average suggests the shares now offer better value.  

For now, and despite continued risks, an analyst consensus estimate of fair value at over $170 per share looks to give grounds for longer-term optimism. 

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