Amazon's Q3 Cloud growth rate is weaker than competitors, predicting that AI will bring tens of billions of dollars in revenue, huge post-market shock | Financial News

Tech giants promoting e-commerce and cloud services globally after the US stock market on Thursday, October 26$Amazon (AMZN.US)$ The financial report for the third quarter of 2023 has been released.

Amazon's revenue and profit for the third quarter both exceeded expectations. Cloud business revenue increased slightly year over year, but it was far worse than rivals Microsoft and Google, and its revenue guidelines for the fourth quarter fell short of expectations. At one point after the market, it rose more than 5%, then declined during the earnings call.

The Amazon CEO then said that it is expected that the opportunities brought by generative artificial intelligence will bring “tens of tens of billions of dollars” in revenue to Amazon's AWS cloud service over the next few years, and its stock price will rise nearly 5% again after the market.

Amazon closed down 1.5% on Thursday. Since entering a downward channel last Monday, it has fallen nearly 10% and hit a five-month low, down 18% from the 52-week high of $145.86 hit on September 14, and entered a technical correction range.

However, Amazon has continued to rise by more than 42% so far this year, outperforming the S&P 500 market with a rise of nearly 8% and the Nasdaq's increase of more than 20% during the same period, making it one of the largest technology stocks with the biggest gains this year.

Of the 55 analysts tracked by the agency FactSet, 52 gave a “buy” rating, and 3 others suggested “hold”, and no one suggested selling. The average target price is $172.87, which means there is still room for 45% increase.

Amazon's Q3 revenue increased 13%, exceeding expectations. Profit was three times that of last year, but the fourth quarter guidelines were slightly poor, raising consumer concerns

Financial reports show that Amazon's revenue for the third quarter increased 13% year over year to 143.1 billion US dollars, higher than market expectations, an 11% year-on-year increase to 141.4 billion US dollars, and a 6.5% increase over the second quarter, indicating that the year-on-year growth rate of revenue in the third quarter was slightly accelerated compared to the past few quarters.

Earnings per share for the quarter were $0.94 per share, far exceeding expectations of $0.58, or three times $0.28 in the same period last year, or an increase of nearly 236%. Operating profit was close to US$11.2 billion, far exceeding expectations of US$7.7 billion, and operating profit margin of 7.8% far exceeding expectations of 5.46%.

According to some analysts, the profit margins of the company's North American and international business have improved recently, reaching the highest level since more than two years, bringing the overall mixed profit margin to a new high level since mid-2021.

Previously, Amazon's performance guidelines for the third quarter were sales between 138 billion and 143 billion US dollars, and operating profit in the range of 5.5 billion to 8.5 billion US dollars. This indicates that the three-quarter report surpassed the company's best expectations.

Andy Jassy (Andy Jassy), who succeeded founder Bezos as CEO in mid-2021, said that the strong three-quarter report is reflected in the further service costs and delivery speed of the store business. AWS cloud business growth continues to be stable, advertising revenue growth is strong, and overall operating profit and free cash flow have increased dramatically. “More importantly, it provides Prime customers with the fastest delivery speed in 29-year history.”

In addition to the increase in revenue from all business lines, the increase in Amazon's profit exceeding expectations is also related to drastic cost cuts. Since last fall, Amazon has laid off 27,000 employees, shut down unprofitable businesses, and reprioritized resource spending, with the aim of maintaining a streamlined and strong organization during a period of high interest rates and high inflation to deal with macroeconomic threats to consumer and corporate spending.

However, Amazon's fourth quarter guidelines are unsatisfactoryThe financial blogger Zerohedge, who has always been known for its rhetoric, claims that this is mainly due to lowering the lower limit of the revenue outlook. Amazon believes that net sales for the fourth quarter will be in the range of 160 billion to 167 billion US dollars. The midpoint forecast is 163.5 billion US dollars, which is equivalent to a year-on-year increase of less than 10%, which is not far from the lowest growth rate in history, and lower than the market's forecast of 166.6 billion US dollars:

“The slightly less-than-expected guide is the latest sign of weak consumer spending as we enter the biggest holiday shopping season at the end of the year. In the call, the CFO also warned customers to remain cautious about prices. This caused Amazon to completely reverse the post-market gains at the beginning of the earnings report.”

Previously, the market also expected Amazon's earnings per share to be $2.07 this year, turning a loss into a profit compared to last year's loss of $0.27 per share. Annual revenue is expected to be 538.1 billion US dollars, an increase of 4.7% over the previous year.

Some analysts pointed out that a smooth transition to earnings per share this year, in addition to demonstrating the favorable performance of the two Prime Day member shopping promotion days during the year and the improvement in retail consumption expenditure trends, will also benefit from the cost control strategy adopted by the company to adjust the scale of the business, and its operating profit margin has been increasing quarter by quarter.

AWS Cloud's revenue growth showed signs of acceleration for the first time in seven quarters. The profit margin was the highest in two years, but the revenue growth rate was far lower than that of competitors

The focus that has received the most attention in Amazon's earnings report is whether the revenue growth of the AWS cloud business can accelerate again.

Although Thomas Champion, an analyst at brokerage firm Piper Sandler, believes based on this week's Microsoft and Google Cloud revenue data, that the “steady growth” of Amazon's cloud business may be more realistic than accelerated growth, the market generally believes that Amazon AWS's revenue will increase 12.7% year over year to 23.1 billion US dollars, and about 5% over the previous quarter's 22.1 billion US dollars.

Financial reports show that the sales volume of Amazon AWS in the third quarter was indeed close to 23.1 billion US dollars, which is basically the same as expected (some media say the market forecast is 23.2 billion US dollars), up 12.3% year on year, representing a year-on-year increase of 12.3%, representingAWS's revenue growth ended the previous six-quarter slowdown. Expansion accelerated for the first time since the fourth quarter of 2021, but the growth rate hovering around 12% is still not very high.

The year-on-year growth rate of this business revenue, which contributed significantly to Amazon's profits, fell from 39.5% in the fourth quarter of 2021 to 12.2% in the second quarter of this year. The slowdown in growth mainly reflects that customers are more concerned about the “optimization” of cloud spending, which is in line with comments from Google management.

In the third quarter, AWS's operating profit increased more than 29% year on year to 7 billion US dollars, 1.3 billion US dollars more than expected, and the highest level in the history of this business. The profit margin soared to 30.25%, the highest in two years.

The bullish view points out that the growth of Amazon AWS will soon begin to accelerate as corporate spending budgets are relaxed and concerns about artificial intelligence workloads from all walks of life expand. The frenzy surrounding generative artificial intelligence is leading to larger cloud computing workloads, which is a direct benefit for public cloud providers such as AWS, where Amazon is ahead of Microsoft and Google in the first place.

However, the market also noticed,The revenue growth rate of Amazon's cloud business is far lower than that of Microsoft Azure's revenue growth of 29% in the third quarter and Google Cloud's revenue growth rate of 22%, which seems to indicate that Amazon is losing some market share in the cloud sector.

Speaking about artificial intelligence in the earnings statement, Amazon management said:

“The AWS team continues to innovate and deliver rapidly, particularly in the area of generative AI. Our custom AI chip, Amazon Bedrock, has become the easiest and most flexible way to build and deploy generative AI applications. Our coding partner, CodeWhisperer, empowers companies with the equivalent of experienced engineers who know all proprietary code, and is driving the momentum of customers such as Adidas, Booking.com, GoDaddy, LexisNexis, Merck Pharmaceuticals, Royal Philips, and United Airlines. All of these big companies are starting to run generative AI workloads on AWS. We're excited about what's to come.”

The core e-commerce business continued to recover, physical store sales were slightly poor, advertising revenue increased more than expected, and remained strong in competition

At the same time,The continued recovery of Amazon's flagship e-commerce business and whether the advertising department can maintain strength are all highlights of this financial report。

Core e-commerce business sales in the third quarter increased 7% year on year to about 57.3 billion US dollars, higher than the forecast of 57 billion US dollars, and also better than the 4% increase in the previous quarter. Amazon once called Prime Day in July the largest promotion in its history.

Other data is mixed. Net sales of physical stores were US$4.96 billion, slightly lower than the forecast of US$4.99 billion; third party seller service revenue increased 20% year over year to US$33.4 billion, higher than the forecast of US$33.4 billion; and subscription service revenue increased 14% year over year to US$10.17 billion, higher than the forecast of US$10.13 billion.

Ad revenue for the third quarter increased 26% year over year to US$12.1 billion, higher than the forecast of US$11.6 billion. According to some analysts, this shows that digital advertising is still one of Amazon's highlights. Third-party sellers and big brands have all increased their advertising spending to increase their popularity in an increasingly competitive market, making Amazon's advertising revenue growth rate far greater than Google's 9%, Facebook's 23%, and Snap's 5%.

In the second quarter, Amazon not only achieved significant improvements in revenue and profit, but also significant improvements in operating cash flow, EBITDA (profit before tax, interest, depreciation, and amortization), and net profit. Its North American business lost US$627 million in the second quarter of last year, and has reversed losses and made a profit of US$3.21 billion in the second quarter of this year, driven by a combination of high profit advertising revenue and higher unit sales volume.

Investors want to know if the company can maintain its strong momentum to support the investment argument for long-term returns. People also want to know if Amazon's recent investment in AWS and artificial intelligence can bring returns and generate higher growth rates.

Amazon fell behind Microsoft and Google in the competition to develop and deploy AI technology at the beginning of this year, then caught up, added a $4 billion investment in San Francisco startup Anthropic, and released a generative AI application called Bedrock, which directly targets OpenAI's ChatGPT and Google's Bard.People hope AI can drive cloud business growth and boost e-commerce sales and profit margins。

Wall Street is optimistic about advertising opportunities and prospects for improving e-commerce profit margins. AWS expects to continue to accelerate growth, but is concerned about regulatory challenges

Before the earnings report was released, Wall Street was generally optimistic about Amazon.

Broker Oppenheimer analyst Jason Helfstein called Amazon its “preferred large-cap stock,” because compared to Google and Meta, the company had “advantages such as more affluent consumers, advertising opportunities, huge potential to improve e-commerce profit margins, and mitigation of adverse factors in AWS.”

Justin Post, an analyst at Bank of America Global Research, also said that credit and debit card summary data showed that online spending in the third quarter increased 1% compared to the same period last year, up 2 percentage points from the second quarter, and logistics efficiency and advertising spending were also more constructive:

“Amazon's two major keys in 2024 are whether AWS can accelerate its return to a high growth range of 15% to 20%, and increase retail profit margins in North America to 5%. (Wall Street News Note: Currently, the market estimates North American operating profit for the third quarter to be 3.6%) At the same time, we believe that AWS will accelerate in the fourth quarter of this year, and growth will accelerate in the first quarter of 2024, thanks to the relaxation of the enterprise cloud spending optimization cycle and the incremental demand for artificial intelligence.”

J.P. Morgan analyst Doug Anmuth also believes that AWS will accelerate growth in the second half of this year along with the retail business. It is expected that monetization of Amazon's generative AI efforts (such as Bedrock, which helps other companies build large language models) will be more meaningful next year:

“Continued elasticity in US consumer spending will drive continued growth in Amazon retail sales, a healthy expansion in North America's profit ratio, and a year-over-year decline in total capital expenditure, all of which will drive significant changes in free cash flow this year.”

However, Goldman Sachs lowered its target price slightly to 175 US dollars, saying that its cloud computing industry survey conducted in September showed that AWS revenue in the third quarter will grow steadily, but competitive pressure from low-priced retailers such as Temu and Shein, as well as rising energy costs, will pose resistance to Amazon physical stores and the AWS business. For every tenfold increase in energy costs, profit before interest and tax will drop by 200 million to 300 million US dollars.

Scott Devitt, an e-commerce analyst at the brokerage firm Wedbush, also concluded:

“Prior to the Three Quarterly Report, investors' opinions on Amazon were mixed. The issues were: 1. AWS's growth trajectory and the company's overall artificial intelligence strategy; 2. Regulatory challenges and the results of the online retail antitrust lawsuit initiated by the US Federal Trade Commission FTC; 3. Potential retail profit pressure brought about by rising oil prices; and 4. Continued competition from Temu, Shein, and TikTok e-commerce.”

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