Amazon is crushing e-commerce and cloud and forecasting a strong holiday quarter

Kathleen William November 1, 2024

Amazon reported a much better-than-expected third quarter on Thursday, with strong growth in online sales, its cloud business and advertising. Margin initiatives lead to increasing profits. Additionally, the fourth quarter guidance was exactly what was needed to keep investors happy. Revenue rose 11% year over year to $158.88 billion, beating expectations of $157.2 billion, according to LSEG estimates. Earnings per share on a generally accepted accounting principles (GAAP) basis rose to $1.43, compared with 94 cents last year and the estimate of $1.14. Operating income rose 56% year over year to $17.41 billion, above the consensus forecast of $14.7 billion. 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, high-margin business. Management has worked hard to shorten delivery times and reduce overall costs. Prime uses free shipping and video streaming with tons of other perks to keep users paying every month. Competitors: Walmart, Target, Microsoft and Alphabet Last Purchase Date: August 12, 2024 Initiated: February 2018 Bottom Line Both sales and operating income in August exceeded the high end of management's forecast. At the time, shares fell nearly 9% to about $168 in response to an outlook that fell short of Street estimates. In our defense of the sell-off at the time, we mentioned how difficult it was for a company the size of Amazon to predict sales in advance. Because of this, management has a track record of remaining conservative and delivering results at the high end or above the guidance range. In August, we also said that selling pressure was becoming excessive because the profitability story was still intact from improving efficiencies in its AWS cloud unit and identifying additional opportunities to reduce the cost of serving its retail customers. That's exactly what happened this time, as the North American and international businesses each achieved year-over-year operating margin improvement for the seventh consecutive quarter. That's the story. The nearly $3 billion increase in operating income and strong fourth-quarter guidance demonstrate the company's focus on improving margins. Sure, the company is investing aggressively in capital expenditures this year and will spend even more in 2025, a trend that has plagued other mega-cap tech companies. However, the market seems to be thwarting Amazon as sales are above average and margins tend to increase. AMZN YTD Berg Amazon's stock performance year-to-date. We reiterate our rating of 1 and increase our price target from $220 to $240, representing a nearly 29% increase from Thursday's closing price of $186.40. Amazon shares rose 5.5% in extended trading after the release, a rise that would more than offset a more than 3% decline in the regular session. Comment Sales at the cloud unit Amazon Web Services (AWS) in the third quarter were essentially in line with consensus forecast. Growth on a constant currency basis remained stable at 19% since the second quarter, breaking a three-quarter streak of accelerating sales growth. “I think we have more demand that we could meet if we had more capacity today,” said CEO Andy Jassy, referring to cloud demand. Notable this quarter were the continued increases in AWS operating margin. The $110 billion annual cloud business is now printing money. Operating margins increased 780 basis points year over year and 256 basis points over the second quarter to approximately 38%, well above estimates. As we highlighted last quarter, some of the margin gains were driven by the impact of a favorable accounting change. This contribution was approximately 200 basis points. But the company has also focused on cost control, such as slowing the pace of hiring, unlocking efficiencies in infrastructure and reducing costs across the company. Increasing sales demand also helps. Within AWS, the artificial intelligence business is now a multibillion-dollar business that is growing at a triple-digit rate year-over-year. Jassy said that AI is “growing more than three times faster than AWS itself at this stage of its development. And we felt that AWS was growing quite quickly.” Quarterly results Like the rest of the company, Amazon achieved sales increases from online stores (7 % revenue growth), subscription services (11% revenue growth) and advertising services (19% revenue growth). Smaller companies such as physical stores (5% sales growth) and other (7% sales growth) also performed better than expected. Third-party seller services (10% revenue growth) missed for the third quarter in a row. In North America, sales rose 9% and operating margin improved to nearly 6%. One reason the company has done a great job of increasing margins is by reducing the cost of serving its online customers. This was one of management's biggest undertakings and led to huge increases in profitability. But the work is never done. On the earnings call, Jassy named three initiatives the company is working on that he believes will have significant long-term impact. First, Jassy believes that there are other benefits in addition to what has already been achieved through Amazon's regionalization initiative and bringing items closer to the customer. Second, he wants more same-day delivery options. This is not only the fastest way to get goods to customers, but also one of the most cost-effective delivery options, according to Jassy. Third, Amazon is innovating in robotics to speed up delivery, reduce delivery costs, and improve safety. “We have about five or six very significant new robotic capabilities in the areas of stowing, picking, packing and shipping, which we ultimately consolidated into one facility to cover the entire workflow,” Jassy explained. These three initiatives were similar to what we learned on the second quarter earnings call, but they're still important to remember because reducing delivery costs is key to Amazon's profitability story. In the international segment, Amazon has now made a profit in every quarter this year. The strength comes from established countries such as the United Kingdom and Germany. Management also cited increased efficiency in the transportation network and better execution in the logistics centers as reasons for the margin increases. Advertising revenue also contributes significantly. Amazon spent $21.4 billion on capital expenditures in the third quarter, bringing the total to $51.9 billion. The company expects to spend $75 billion in 2024, much higher than the consensus forecast of $66.5 billion. The majority of these investments will support demand for AI services, technology infrastructure, and the fulfillment and transportation network. Project Kuiper was not discussed on the earnings call. This is Amazon's emerging satellite internet business. Kuiper's costs were partly responsible for margin pressure in Amazon's North American business segment in the second quarter. Amazon's key holiday guide for the fourth quarter was solid. The company expects net sales of $181.5 billion to $188.5 billion, up 7% to 11% year over year. The high end of the forecast reflects the consensus estimate of $186.3 billion, but the midpoint of $185 billion was a bit of a miss. The operating result forecast shows good profitability dynamics. Management expects operating income of $16 billion to $20 billion, averaging $18 billion, beating the consensus estimate of $17.33 billion. (Jim Cramer's Charitable Trust is long AMZN. A full list of stocks can be found here.) As a subscriber to 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 foundation's portfolio. If Jim discussed a stock on CNBC television, he waits 72 hours after the trade alert is issued before executing the trade. THE INVESTING CLUB INFORMATION SET FORTH ABOVE IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, ALONG WITH OUR DISCLAIMER. THERE ARE NO fiduciary duty or duty IN RECEIVING YOUR INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO SPECIFIC RESULTS OR PROFITS ARE GUARANTEED.

Amazon packages are prepared for delivery at Amazon's Robotic Fulfillment Center in Sutton Coldfield, England, on December 19, 2023.

Nathan Stirk | Getty Images News | Getty Images

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