Amazon’s Resilience and Growth Prospects: A Positive Outlook

A high quality company, but lacking investor appeal.

It has taken awhile to get this together after Amazon´s earnings for Q2. There has been so many doom-sayers on social media, but here is the thing: Amazon is more than fine, they just need to find their mojo for investors.

Despite a slight miss in retail revenues for the second quarter of 2024 and a subsequent 7% drop in stock value after hours, Amazon remains a robust contender in the large-cap stock arena. This performance can largely be attributed to the company’s strong AWS growth and potential for retail margin expansion as we head into the holiday season.

Key Drivers for Amazon’s Future Success

Amazon’s future looks promising due to two primary factors: the accelerating growth of AWS and the anticipated improvement in retail margins.

1. AWS Growth: Amazon Web Services (AWS) has shown impressive performance, with revenue growth accelerating to 19% year-over-year in the second quarter of 2024. This growth outpaced peers like Google Cloud and Microsoft Azure, which highlights AWS’s strong market position and the increasing demand for cloud services. This acceleration is crucial as businesses continue to migrate from on-premise solutions to the cloud, leveraging AWS’s robust infrastructure and innovative services.

2. Retail Margin Growth: Despite the lower-than-expected retail revenues, Amazon’s retail margin growth remains on track. The third-quarter profit is expected to grow quarter-over-quarter, and the margins for the fourth quarter are projected to be up year-over-year. This positive outlook is supported by several factors, including faster shipping times, which improve conversion rates, especially for essential items, and overall cost-to-serve declines.

2Q24 Results Summary

Amazon’s revenue for the second quarter of 2024 was $148 billion, reflecting a 10% year-over-year growth, just below the high end of guidance. The North American retail segment grew by 9% year-over-year, while the international segment grew by 7% year-over-year. AWS revenue was particularly strong, growing by 19% year-over-year to $26.3 billion, in line with forecasts. Advertising revenue also grew significantly, reaching approximately $12.8 billion, a 19.5% year-over-year increase.

Unit growth was solid at 11% year-over-year, and unit shipping cost growth was 8%, down 200 basis points from the previous quarter. These results underscore Amazon’s ability to drive growth through improved efficiency and strong performance in its core segments. This also shows us that there is continuous focus on margin improvement. This is an area where Andy Jassy has done a very solid job.

AWS Segment Results Solid

AWS continues to be a major growth driver for Amazon. The segment’s revenue increased by $1.2 billion quarter-over-quarter, showing solid growth on a year-over-year basis. Management highlighted three key drivers of AWS’s staying power: continued optimization, cloud migrations from on-premises infrastructure, and new generative AI workloads. AWS’s strong margins, which benefited from a server life change, further emphasize its profitability and growth potential.

Amazon, might be one of the best positioned company´s to deploy AI for B2B. Some of the use cases that Amazon is well positioned to offer are:

1. Low-cost, high-value performer: Amazon’s Gen AI can rapidly analyze unstructured data, such as call recordings, to generate actionable insights. By comparing interaction quality against a proprietary call model, it helps improve customer service efficiency and effectiveness.

2. Enhances frontline reach: Amazon’s AI tools act as live copilots for customer service agents, enhancing their performance during customer interactions. These tools provide structured, targeted support, enabling agents to deliver more effective and personalized service.

3. Simplifies the process: Amazon’s Gen AI automates routine tasks, such as authentication and payment issues. This automation frees up agents to handle more complex cases, boosting overall efficiency and ensuring a higher level of personalized customer service.

Retail Segments More Mixed

While online stores revenue exceeded forecasts by 1.5%, third-party seller services and advertising were slightly below expectations. Operating income was $14.7 billion, 8% above forecasts but slightly below higher market expectations of $15 billion. CFO Olsavsky noted rising investments in Project Kuiper and seasonal expenses as factors affecting future income.

Guidance & Estimate Change

For the third quarter of 2024, Amazon’s guidance includes revenue of $154 billion to $158.5 billion and operating income of $11.5 billion to $15 billion. These mid-points are below prior forecasts, leading to a slight decrease in revenue and operating income estimates for 2024 and 2025. Despite this, the overall outlook remains positive, with long-term growth prospects largely unchanged.

Addressing Concerns and Forward Guidance

The primary debate following Amazon’s earnings is whether the company is entering an investment phase, given that the third-quarter operating income guidance came in below consensus. While investments are indeed ramping up, particularly with Project Kuiper and AI integration, these are strategic initiatives aimed at long-term growth and market leadership.

Amazon’s guidance for the third quarter, calling for net sales of $154 billion to $158.5 billion and operating income between $11.5 billion and $15 billion, reflects a cautious approach amidst economic uncertainties. However, the ongoing efforts to improve shipping efficiencies, combined with the potential for Prime Video ads to drive higher retail margins, suggest that Amazon’s conservative guidance could be an underestimate of its actual performance potential.

Conclusion: A Constructive Outlook

Despite the short-term challenges and the stock’s dip, I remain constructive on Amazon’s prospects. The company’s strategic focus on enhancing AWS capabilities, integrating AI across its services, and driving efficiency in its retail operations positions it well for sustained growth. The accelerating growth in AWS, faster shipping times, and the upcoming launch of high-margin revenue initiatives like Prime Video ads are all positives for Amazon.

Amazon’s ability to generate substantial revenue and beat EPS estimates by 20% in a challenging economic environment is a sign of high quality in the company. Amazon’s fundamentals are strong, and its growth strategy is rooted in expanding profitable segments like AWS.

While the stock has been relatively flat over the past few years, this period of investment and strategic realignment could pave the way for renewed growth. The comparison with other major companies that return capital to shareholders through dividends and buybacks is valid. However, Amazon’s reinvestment into its core business and new ventures like Project Kuiper and AI integration shows a commitment to long-term value creation.

Investors’ frustration with Amazon’s lack of shareholder returns is understandable, but this earnings reaction could serve as a wake-up call for the company to reconsider its approach. By focusing on sustainable growth and potentially exploring shareholder-friendly initiatives, Amazon can reassure its investors and maintain its position as a top large-cap stock. Apple, Microsoft, Google, and Meta are all engaged in both share buy-backs and dividends as part of their capital allocation strategies. Amazon is yet to explore either. This is something the company really should start to care about.