Amazon crushed it in e-commerce and cloud, forecast an impressive holiday quarter
Amazon reported a much better-than-expected third quarter Thursday, with strong growth across online sales, its cloud business and advertising. Margin initiatives lead to soaring profits. Additionally, the fourth-quarter forecast was exactly what was needed to keep investors happy. Revenue increased 11% year over year to $158.88 billion, beating expectations for $157.2 billion, according to estimates compiled by LSEG. Earnings per share based on generally accepted accounting principles (GAAP) increased to $1.43, compared with 94 cents last year and the $1.14 estimate. Operating income increased 56% over last year to $17.41 billion, a beat versus the $14.7 billion consensus forecast. 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 business with high margins. Management has been working to aggressively decrease delivery times and reduce overall costs. Prime leverages free shipping and video streaming with tons of other perks to keep users paying every month. Competitors : Walmart , Target , Microsoft and Alphabet Most recent buy date: Aug. 12, 2024 Initiated : February 2018 Bottom line Both revenue and operating income exceeded the high end of management’s guidance in August . Back then, the stock fell nearly 9% to roughly $168 in response to an outlook that failed to meet the Street’s estimates. In our defense of the sell-off at the time, we commented on how hard it is for a company of Amazon’s size to pinpoint revenue in advance. That’s why management has a track record of guiding conservatively and delivering results at the high end or above its guidance range. In August, we also said the selling pressure was getting excessive because the profitability story was still intact through the efficiency gains in the AWS cloud unit and the identification of more ways to lower its cost to serve its retail customers. That’s what happened this time around as its North America and International businesses each delivered its seventh consecutive quarter of year-over-year operating margin improvement. This is the story. The nearly $3 billion beat on operating income and strong fourth-quarter guide proves the company is focused on lifting margins. Sure, the company is spending aggressively on capital expenditures this year and will spend even more in 2025, a trend that has dinged other mega-cap tech companies. However, the market appears to be giving Amazon a pass because sales are outperforming, and margins are trending higher. AMZN YTD mountain Amazon’s year-to-date stock performance. We’re reiterating our 1 rating and raising our price target to $240 price target from $220, implying nearly 29% upside from Thursday’s close of $186.40. Amazon shares jumped 5.5% in extended trading after the print, a gain that would more than erase the more than 3% decline in the regular session. Commentary Cloud unit Amazon Web Services (AWS) revenue in the third quarter was essentially in line with the consensus forecast. Growth on a constant currency basis held steady from the second quarter at 19%, breaking a three-quarter streak of accelerating revenue growth. “I believe we have more demand that we could fulfill if we had even more capacity today,” CEO Andy Jassy said, referring to cloud demand. What was notable this quarter was the continued AWS operating margin gains. The cloud business, with its annualized revenue run rate of $110 billion, is now printing money. Operating margins expanded 780 basis points from last year and 256 basis points from second quarter to about 38%, well above estimates. As we pointed out last quarter, some of the margin gains are due to the impact of a favorable accounting change. That contribution was about 200 basis points. But the company has also been focused on cost controls like slowing the pace of hiring, unlocking efficiencies in its infrastructure, and reducing costs across the business. Accelerating top line demand helps as well. Within AWS, its artificial intelligence business is now on a multibillion-dollar revenue run rate growing at a triple digit year-over-year percentage. Jassy said AI is “growing more than 3 times faster at this stage of its evolution as AWS itself grew. And we felt like AWS grew pretty quickly.” Quarterly results As for the rest of the company, Amazon delivered revenue beats across Online Stores (7% revenue growth), Subscription Services (11% revenue growth), and Advertising Services (19% revenue growth). Smaller businesses like Physical Stores (5% revenue growth) and Other (7% revenue growth) were better than expected too. Third Party Seller Services (10% revenue growth) missed for the third quarter in a row. In North America, sales increased 9% and operating margins improved to nearly 6%. One reason why the company has done a great job boosting margins is by lowering the cost to serve its online customers. This has been one of management’s biggest undertakings, and it’s led to huge profitability gains. But the work is never done. On the earnings call, Jassy gave three initiatives the company is working on that he believes will have meaningful long-term impact. First, Jassy thinks there are still more gains to be had on top of what’s already been done in Amazon’s regionalization initiative and getting items closer to the customer. Second, he wants more same-day delivery facilities. Not only is this the fastest way to get goods to shoppers, but Jassy said it’s also one of its lowest-cost ways to deliver. Third, Amazon is innovating in robotics to speed delivery, reduce costs to serve, and improve safety. “We have about five or six very significant new robotics capabilities in the areas of stowing, picking, packing, and shipping that we have finally put into one facility to get the entire workflow,” Jassy explained. These three initiates were similar to what we learned on the second-quarter earnings call, but it’s still important to remember because reducing the cost to serve is the key to Amazon’s profitability story. In the international segment, Amazon has now turned a profit in each quarter this year. Strength is coming from established countries like the United Kingdom and Germany. Management also cited efficiencies in the transportation network and better execution in fulfillment centers as reasons behind the margin gains. Advertising revenue is a big contributor, too. For 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, much more than the $66.5 billion consensus forecast. The majority of these investments are going to support demand for AI services, technology infrastructure, and its fulfillment and transportation network. Project Kuiper was not discussed on the earnings call. That’s Amazon’s emerging satellite internet business. Kuiper’s costs were partly to blame for squeezing margins in Amazon’s North American operating segment during the second quarter . Guidance Amazon’s fourth-quarter all-important holiday season guide was solid. The company expects net sales of $181.5 billion to $188.5 billion, an increase of 7% to 11% year over year. The high end of guidance captures the consensus estimate of $186.3 billion, but the midpoint of $185 billion was a small miss. The operating income forecast shows good momentum in profitability. Management expects operating income of $16 billion to $20 billion, which at a midpoint of $18 billion beats the consensus estimate of $17.33 billion. (Jim Cramer’s Charitable Trust is long AMZN. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club 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 charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Amazon parcels are prepared for delivery at Amazon’s Robotic Fulfillment Centre on December 19, 2023 in Sutton Coldfield, England.
Nathan Stirk | Getty Images News | Getty Images
Amazon reported a much better-than-expected third quarter Thursday, with strong growth across online sales, its cloud business and advertising. Margin initiatives lead to soaring profits. Additionally, the fourth-quarter forecast was exactly what was needed to keep investors happy.