Amazon: Retail with soaring profits, but can't support the paralyzed "AWS"?

After the US stock market closed on April 28th Beijing time, Amazon released its Q1 2023 financial report. The core impression is that the repair of the retail sector from last quarter continued, while AWS continued its downward trend. The key points are as follows:

1. Overall performance: In this quarter, Amazon achieved total revenue of 127.4 billion US dollars, with a quarter-on-quarter growth rate of 9.4%, slightly exceeding the market's expected 124.7 billion. Revenue showed a slight improvement, while operating profit reached nearly 4.8 billion US dollars, far exceeding the market's expected 2.95 billion. It also set a new record for profit in the past 6 quarters since Q3 2021. The significant improvement in profit is due to the huge potential for profit restoration in the retail sector, as previously pointed out by Dolphin.

2. The biggest highlight - the retail sector begins to return to profit: The source of the unexpected profit can be traced to the expected profits from AWS, but the North American retail sector achieved an operating profit of 900 million this quarter, significantly improved from a loss of 240 million last quarter. The loss from the international retail sector also shrank significantly from over 2 billion to 1.25 billion, a total reduction of over 1.6 billion compared to market expectations. Also, unlike last quarter, where only the North American sector made profit, the overseas sector also showed signs of recovery.

Combining the company's previous drastic measures, such as layoffs, optimizing logistics and distribution efficiency, and closing physical stores, the degree and speed of profit improvement in the retail sector are quite impressive.

3. Retail sector bottoming out?: The trend of the retail industry gradually moving out of the trough after a long-term grinding is continuing. Amazon's retail sector achieved a revenue of 106 billion US dollars this quarter, with a growth rate of 8% YoY, a QoQ increase of about 1%.

Looking at different regions, the pan-retail businesses in North America grew by 11% YoY this quarter, which is significantly higher than the roughly 7% growth rate of the total retail sales in the US excluding motor vehicles in the first quarter. When the economy and overall retail market are declining, more cost-effective online shopping becomes more dominant. At the same time, the international retail sector's revenue also stopped falling and turned positive with a 1% growth rate this quarter after 5 quarters of negative growth. Excluding exchange rate effects, the revenue growth rate reached 9%, gradually reducing the burden on the entire sector.

Looking at it more closely, various retail businesses, such as the 3P seller service and e-commerce advertising after the introduction of various monetization measures, have shown a rebound in revenue growth.

4. AWS "slipping into the abyss"? Given the poor performance of Azure's growth rate in Microsoft's earlier financial report, AWS's performance also appeared bleak. This quarter, AWS revenue was 21.4 billion US dollars, with a QoQ growth rate that further declined 4 percentage points to 20%. At the same time, the absolute value of revenue decreased by 0.2 billion US dollars from last quarter, marking the first time in history that Dolphin can trace. It can be seen that the degree of global cloud service demand weakness is quite severe. On the profit side, in this quarter AWS achieved an operating profit of 5.12 billion US dollars, and the operating profit rate remained at 24% compared to the previous quarter without any significant decline, but also without any positive surprise. From the perspective of the expectation difference, AWS did not bring bad news on incremental revenue, but from the performance trend, the decline is still continuing.

5.The guidance continues to point to robust retail: For the Q2 performance guidance, the company expects the median revenue to be 130 billion, which is in line with market expectations. According to information from the conference call, the year-on-year growth rate of AWS in Q2 may be less than 10%, which means that the growth of the retail sector is still at a relatively robust level, about 7% to 8%.

At the same time, the operating profit guidance is 2 to 5.5 billion. Although the middle value is lower than the market expectation of 4.8 billion, considering that the company's actual performance tends to the upper limit of guidance, it can be seen that the profit release of the company in the next quarter will still be slightly improved.

The Dolphin from Changqiao's point of view:

Overall, the performance of the retail sector is relatively strong since the previous quarter, while AWS cloud business continues to be weak. When the relative advantages and disadvantages of 2C and 2B Internet are reversed, the performance of Amazon in this quarter still continues to support the above-mentioned judgment of the Dolphin.

This quarter's financial report reflects the deep and bottomless growth slide of AWS cloud business, while the retail business has started to relatively dominate under the background of economic weakness. What's more important is that under the company's effective cost reduction and efficiency improvement measures, the retail sector that has been losing money for a long time has begun to rapidly reduce losses and turn profits, and there is still a lot of room for further improvement in the future.

Therefore, the profit margin of the retail sector far exceeds expectations, and the previously undervalued retail sector is expected to usher in a revaluation, and the company's stock price also rises by more than 10% after hours of trading. However, in the conference call, the stock price turned and fell rapidly due to the continued sharp decline in the AWS growth rate in the next quarter.

Overall, the Dolphin currently holds a relatively conservative attitude towards the entire cloud computing sector, and the company's cost reduction measures are unlikely to be completely reversed in the short term. At the same time, the risk of macroeconomic weakness in the United States should also be guarded against. Therefore, a cautious and optimistic attitude is still held in the short term.

However, beyond the macro impact, there is basically no suspense that the profit margin of the Amazon retail sector will return to the high single digits in the past. Due to the increase in the proportion of 3P sellers' services and advertising revenue, there is also a high probability of an upward breakthrough in profit margins. At the same time, the optimization of the company's cloud usage will eventually reverse, and cloudification is a long-term trend that is difficult to reverse.

Therefore, in the medium to long term, the Dolphin believes that there is considerable room for Amazon to be upwardly revalued, and the actual problem lies in whether it is willing to bear short-term fluctuations.

Subsequently, Dolphin from Changqiao will share the conference call summary with the user group of Changqiao App and Dolphin through the WeChat account "dolphinR123", and welcome interested users to join the Changqiao Dolphin Investment Research Group to obtain the conference call summary in the first time. Detailed review:

1. AWS cloud business falling as expected

As seen from the earlier released Microsoft financial report, most businesses experienced a rebound except for Azure-led cloud services, which are still in a continuous decline. Therefore, Dolphin believes that AWS is most likely unable to escape the same trend, which is also not surprising in reality.

In the first quarter, AWS revenue was $21.4 billion, and the growth rate further decreased by 4pct to 20% on a month-on-month basis. However, it is worth noting that AWS revenue absolute value also decreased by $0.2 billion month-on-month, which is unprecedented in Dolphin's traceable history, repeatedly verifying the severity of the global cloud service demand slump.

However, although AWS's growth is still quite weak this quarter in absolute performance, compared with the other two major cloud service providers, their cloud business growth rate has also slowed down by about 4pct month-on-month. At the same time, based on the company's earlier gloomy guidance, the market's revenue expectations for AWS are only 210 billion. From the perspective of the expectation difference, this quarter's performance of AWS did not bring bad news.

In terms of profits, AWS achieved an operating profit of $5.12 billion this quarter, and the operating profit rate remained at 24% month-on-month without significant decline. With massive layoffs and cost optimization, as well as a decline in energy costs in Europe and the United States in the first quarter, the company successfully stopped the continued deterioration of profit margins. However, compared with the market's expected profit of 5.22 billion, the progress of improvement did not exceed expectations.

Overall, when the cloud business will bottom out is currently the most important and pending issue for major US Internet giants. Considering the trend of further economic slowdown in the United States, Dolphin cannot say whether AWS has passed the worst period.

2. Retail business has nowhere to go but up, is turning point approaching?

While the cloud business continues to decline, the long-term bottomed-out retail business trend is also continuing to improve. This quarter, Amazon's retail business achieved revenue of $106 billion, an annual growth rate of 8%, and increased by about 1pct compared to the previous quarter.

Looking at it by region, the pan-retail business in North America grew by 11% year-on-year this quarter. It is significantly higher than the 7% growth rate of total retail sales excluding motor vehicles in the United States in the first quarter and the 10% growth of online retail overall. It can be seen that while the US economy and overall retail sales are going downhill, more cost-effective online shopping is starting to dominate. At the same time, the international retail sector's revenue has also stopped falling and turned up this quarter, up 1% after five quarters of negative growth. Excluding the impact of exchange rates, revenue growth reached 9%.

Considering that the impact of exchange rate factors is gradually fading away, the drag on the overall retail sector from overseas is likely to further decrease.

Revenue growth bottomed out and rebounded for each sub-business under the retail sector, as follows:

①The revenue of online self-operated retail narrowed its YoY decline to -0.1% this quarter and is expected to turn positive in the future.

②Revenue from third-party seller services reached $29.8 billion, with a YoY growth rate of 17.7%. Although slightly lower than the previous quarter, it still approached a growth rate of 20%, reflecting the revenue potential released by Amazon's improved pricing of warehousing, freight, and other services (although it may not be easy for 3P sellers).

③Subscription service revenue has also strengthened this quarter, with a YoY growth rate of nearly 15%. Dolphin thinks that the expansion of Prime membership services in various service types such as online streaming, sports events, and cloud gaming will help to push up the mid-term growth center of member subscriptions.

④Of the other income this quarter, $9.5 billion came from merchant advertising services, with a YoY growth rate of 20.7%. As Amazon gradually increases its monetization rate and benefits from higher conversion rates for e-commerce advertising, the company's growth center for advertising has remained relatively strong.

By adding up the cloud and retail businesses, Amazon achieved a total revenue of $127.4 billion this quarter, with a YoY growth rate of 9.4%. Although the growth rate improved slightly from the previous quarter, it was significantly higher than the market's expected $124.7 billion. Although the revenue of the cloud sector was lower than expected, the sustained bottoming out and rebound of the retail sector is taking over the support of the company, and the trend of reversal of strengths and weaknesses in the consumer/industrial Internet sector continues.

The biggest bright spot: the retail sector turned losses into profits!

In addition to the retail and cloud service sectors' reversal of strengths and weaknesses at the revenue level, the repair of the retail sector's profits beyond expectations has also promoted the market to revalue the retail sector, supporting the overall valuation of the company. Specifically, the company achieved an operating profit of $4.8 billion this quarter, far exceeding the market's expectation of $2.95 billion, and also reached the highest profit point in the six quarters since 3Q21.

Looking at the breakdown, the operating profit of AWS cloud business of 5.2 billion yuan is basically in line with expectations, but the performance repair of the retail business is quite remarkable. Specifically, the North American retail business achieved an operating profit of 900 million yuan this quarter, a significant improvement from the loss of 240 million yuan in the previous quarter. The loss of the international retail business also narrowed significantly from over 2 billion yuan to 1.25 billion yuan. Together, they were more than 1.6 billion yuan less than market expectations.

Combining management's multiple statements on optimizing capacity, increasing additional profit channels, and reducing non-essential investments to improve efficiency, the speed and magnitude of the company's retail business profit repair are highly anticipated.

Looking at the cost breakdown, 1) the gross profit margin of this quarter is 46.8%, an improvement of more than 4 percentage points, which shows that the company's cost optimization is very effective. In addition to changes in revenue structure, Dolphin believes that the company's optimization of personnel costs and server operating costs is also a very important improvement factor.

1. From an expense perspective, after layoffs and optimization of the logistics system utilization rate, the proportion of performance fees as a percentage of revenue continued to decrease year-on-year by 1 percentage point this quarter.

2. However, the company's sales expenses and technology & content expense ratio are still relatively high, among which the technology & content expense ratio continued to rise from the previous quarter to 16%. The investment in membership business in content still significantly increased the absolute size of this expense.

Market expenses also increased by 0.9 percentage points year-on-year to 8%, higher than the pre-epidemic level of less than 6%. The marketing investment to cope with the slowdown of AWS growth in this business may be the main driving factor.

However, according to the financial report disclosure, Amazon has once again laid off more than 70,000 people this quarter, and has net layoffs of more than 150,000 people since its peak. The company also announced recently that it will lay off 9,000 people in the AWS business. Visible initiatives by the company to reduce costs and increase efficiency continue to be vigorously pursued.

Looking at the fixed asset spending for this quarter, which was 13.1 billion yuan, both the absolute size and year-on-year growth rate are continuing to contract. Therefore, the Dolphin believes that as long as there are no black swan events such as an economic collapse in the next few quarters, profit release may continue even if the company's revenue growth continues to slow down.

Dolphin's past Amazon research:

Financial report review

February 3, 2023 conference call "Amazon: Controlling Cost Inputs without Harming Prospects"

February 3, 2023 financial report review "Without Bezos, Does Amazon Have a Future?"

October 26, 2022 conference call "Can Microsoft Safely Navigate the Downward Economic Cycle? (1Q23 conference call summary)"

October 26, 2022 financial report review "No One is Immune to Cycles, Not Even Microsoft"

July 29, 2022 conference call "Capital Investment Will Continue to Grow, but Amazon Will Be More Cautious (Conference Call Summary)"

July 29, 2022 financial report review "[Iron-fisted Layoffs of 100,000 Troops, Amazon Finally "Recovers"] (https://longbridgeapp.com/topics/3215407)"

April 29, 2022 conference call "Even American Giants Talk About Reducing Costs and Increasing Efficiency, Amazon Conference Call Summary"

April 29, 2022 financial report review "Inflation "Eats Up" Profits, This Time AWS Can't Save Amazon"

February 4, 2022 conference call "Market Fluctuations, Amazon on Its Own Path (Conference Call Summary)" On February 4, 2022, financial report review "AWS Turns the Tide, Amazon Escapes Unscathed".

In-depth Research

On February 28, 2023, "Microsoft and Amazon fall, is it time for Airbnb & Uber to claim the throne?"

On May 30, 2022, "Macroeconomic 'headwinds' too strong, Amazon can't even hide in the cloud".

On December 3, 2021, "Both unprofitable, why is Amazon more favored than Alibaba?"

Risk Disclosure and Statement for this Article: Dolphin Investment Research Disclaimer and General Disclosure.