Amazon’s messy second quarter doesn’t change our outlook on the stock
Amazon shares are getting dinged on Thursday after its second-quarter sales missed expectations, despite a terrific performance from its cloud business. It doesn’t change our thesis for this longtime core holding. Revenue increased 10% year-over-year to $147.98 billion, missing expectations for $148.5 billion, according to estimates compiled by LSEG. Earnings per share based on generally accepted accounting principles (GAAP) increased to $1.26, compared with 65 cents last year and the $1.03 estimate. Operating income increased 91% over last year to $14.67 billion, a beat versus the $11.37 billion consensus forecast and above the high-end of management’s previous guidance range of $10 billion to $14 billion. Amazon Why we own it : Amazon may be widely known for online shopping, but its cloud business is the real breadwinner. Advertising is another fast-growing business with high margins. Investment in robust e-commerce logistics infrastructure makes its online storefront the place to be as management works 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 : Aug. 23, 2023 Initiated : February 2018 Bottom line It was by no means a clean quarter from Amazon, but that doesn’t mean the story has changed. Amazon Web Services delivered great results, hitting a $105 billion revenue run rate and with operating margins that continued to trend higher despite heavy investment to keep up with demand. On the other hand, there were misses across its e-commerce and associated businesses, which we obviously don’t like to see. But the crucial part of the story, the part that hasn’t changed, is that the company continues reduce its “cost to serve,” which is how much it costs Amazon to deliver a product to customers. Guidance was light and that matters when the market is worrying about a discretionary spending slowdown. However, it’s hard for a company of Amazon’s size to pinpoint revenues in advance, making it likely that the forecast is on the more conservative side. When there are outside events like the Olympics and the upcoming presidential election, people may be less focused on filling up their Amazon carts. Amazon is the company that will pick up on this trend first. Still, management has a track record of delivering results at the high end or above its guidance range, and next quarter may not be different. With AWS humming and management identifying more ways to lower its cost to serve, Amazon’s profitability story is still intact. We reiterate 2 rating and our $220 price target but will look for additional weakness in this volatile market to upgrade to a 1. Quarterly results Let’s start off with the good. Amazon Web Services was the star of the report, with revenue growth accelerating for the third straight quarter to 19% year over year, beating expectations of 18%. On the post-earnings conference call, CEO Andy Jassy pointed out three macro trends driving the strong AWS growth. “First, companies have completed the significant majority of their cost optimization efforts and are focused again on new efforts,” Jassy said. “Second, companies are spending their energy again on modernizing their infrastructure and moving from on-premises infrastructure to the cloud.” There’s also an AI component that’s driving sales higher, with “builders and companies of all sizes are excited about leveraging AI. Our AI business continues to grow dramatically with a multi-billion dollar revenue run rate,” he added. AWS ended the quarter with a backlog of about $156.6 billion, up 9% year over year. The operating margins at AWS were incredible, expanding to about 35.5%, compared to estimates of 32.5% and 24.2% one year ago. To be fair, some of the big year-over-year increase is the impact of a favorable accounting change, but margins are also benefitting from cost controls and slowing in the pace of hiring. As for the rest of the company, sales came in below consensus estimates, causing overall revenue to miss estimates for the first time since October 2022. In North America, where sales grew 9% year over year, management provided some color that might help explain the slower trends from the 12% rate in the first quarter. One issue is that Amazon is seeing lower average selling prices across its stores because consumers are trading down on price where they can. While that may lead to lower sales levels per product, it may help Amazon gain market share. Jassy pointed out that discretionary, higher-ticket items like computers and TVs are growing faster at Amazon than the rest of the industry, but not as fast as one would expect in a hot economy. Additionally, Jassy believes Amazon’s faster delivery speeds are helping it gain share in the everyday essentials. Another reason for the soft number was related to seller fees. These came in below management’s expectations due to a change in behavior from its latest fee change. Third party seller services was the business line that missed consensus estimates by the widest margin. Still, Jassy doesn’t think these are long-term issues to be worried about. “While some of these issues compress short-term revenue, we generally like these trends,” he said on the call. Although North America operating margins declined slightly from 5.77% in the first quarter to 5.63% in the second quarter, CFO Brian Olsavsky attributed the decline to a step up in investment areas like satellites. Olsavsky said the profitability of North America stores improved quarter over quarter, driven by further improvements in its cost to serve. “We saw improvements in our cost to serve driven by our efforts to place inventory more regionally, closer to where our customers are. This resulted in more consolidated shipments, with higher units per box shipped. We also saw packages traveling shorter distances to customers, and this also led to better on-road productivity in our transportation network,” Jassy explained on the call. Reducing the cost to serve is the key to Amazon’s emerging profitability story. The company sees more levers it can pull in the future to reduce costs like by expanding the use of automation and robotics, further building out its same-day network, and regionalizing its inbound network. On the international side, Amazon attributed the profitable quarter mostly to improvements in its cost structure in established countries and expanded customer offerings in emerging countries. For capital expenditures, Amazon invested $30.5 billion through the first half of the year and expects this figure to rise in the second half to support the growing need for AWS infrastructure. This is not investing out of fear of underinvesting. The company pointed to strong demand signals for Gen-AI and other workloads. Guidance Amazon’s third-quarter guide left investors wanting more. The company expects net sales of $154 billion to $158.5 billion, an increase of 8% to 11% year over year. The high end of guidance captures the consensus of $158.2 billion, but it’s a miss on the analysts’ consensus of $156.25 billion. The operating income forecast was light, too. Management expects operating income of $11.5 billion to $15 billion, which at a midpoint of $13.25 billion misses the consensus of $15.34 billion. Operating income in the third quarter of 2023 totaled $11.2 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.
The Amazon Prime logo on a package in Manhattan.
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Amazon shares are getting dinged on Thursday after its second-quarter sales missed expectations, despite a terrific performance from its cloud business.
It doesn’t change our thesis for this longtime core holding.
