Amazon Web Services revenue accelerates for two consecutive quarters, Q1 profit triples, no dividend payout, up 6% after hours and then narrows | Financial Report Insights

On Tuesday, April 30th, after the U.S. stock market closed, Amazon, a tech giant actively involved in promoting e-commerce, cloud services, and participating in the "AI arms race", released its financial report for the first quarter of 2024.

Amazon's first-quarter report was overall positive, with analysts stating that its total revenue growth was the fastest in a year. AWS cloud revenue accelerated for the second consecutive quarter, with the operating profit margin of this business reaching a historical high. However, the revenue and operating profit guidance for the second quarter was slightly below expectations. The second-quarter revenue growth rate may be the slowest since December 2022, and Amazon did not follow Meta and Google in announcing its first-ever dividend, causing the post-market stock price to jump by 6% before significantly narrowing.

Amazon's stock fell by 3.3% at the end of Tuesday's trading session, moving away from its two-week high. It has risen by 15% year-to-date, significantly outperforming the S&P 500's 5.6% increase, the Nasdaq's 4% increase, and the Dow Jones Industrial Average, of which it became a component stock in February, remaining relatively flat. Over the past 12 months, Amazon has risen by over 71%, but has fallen by over 7% from its historical closing high of $189.05 on April 11, the first time in two years.

As a leading company in the field of artificial intelligence, Amazon is highly favored by investors in large-cap tech stocks. In the past three months, 42 analysts have covered the company, all with a buy rating, with an average target price of $213.74, representing a 22% upside potential. Wall Street believes that the company's AI-driven cloud computing, e-commerce, advertising revenue, and profit margins will all accelerate growth.

Amazon's first-quarter revenue grows by over 12%, profit triples, AWS annual sales expected to reach $100 billion

The financial report shows that Amazon's first-quarter revenue increased by 12.5% from $127.4 billion in the same period last year to $143.31 billion, exceeding analysts' expectations of $142.6 billion, and marking the fastest growth in a year. Adjusted earnings per share (EPS) reached $0.98, higher than the expected $0.83, more than triple the $0.31 in the same period last year, or a 216% year-on-year increase.

However, both revenue and EPS were weaker compared to the end-of-year holiday shopping season in the fourth quarter of last year, with revenue of $169.96 billion and EPS of $1. At that time, Amazon's revenue increased by 14% year-on-year, and EPS surged from $0.03 in the fourth quarter of 2022.

Operating profit in the first quarter was also triple that of $4.8 billion in the same period last year, or a 219% year-on-year increase to $15.3 billion, higher than the expected $11.2 billion, and unexpectedly surpassing the $13.2 billion in the fourth quarter of last year. Net profit in the first quarter increased by 225% from $3.17 billion in the same period last year to $10.4 billion, higher than the expected $8.9 billion, but weaker than the two-year high of $10.62 billion in the fourth quarter of last year The company stated that the net profit for the first quarter of 2024 includes a pre-tax valuation loss of $2 billion on the common stock investment in Rivian, an electric truck startup known as the "Tesla rival", significantly deeper than the $500 million pre-tax valuation loss in the same quarter last year.

Some analysts believe that the increase in operating profit far exceeds revenue growth, indicating that cost reduction and a focus on efficiency are boosting its profitability. Since the end of 2022, Amazon has laid off over 27,000 employees and also dismissed hundreds of employees from its health and AWS divisions in the first quarter of this year.

In terms of performance guidance, Amazon expects second-quarter net sales to be between $144 billion and $149 billion, representing a year-on-year growth of 7% to 11%. However, the market expects revenue to surpass $150 billion or increase by another 12%. Operating profit is expected to be between $10 billion and $14 billion, at least 30% higher than the $7.7 billion in the same period last year, but the midpoint of the range is slightly below the market's expected $12.56 billion.

Financial blog Zerohedge stated that this indicates Amazon's second-quarter revenue growth rate will be the slowest since December 2022.

Amazon's CEO Andy Jassy mentioned that many companies are reinvesting in infrastructure modernization, coupled with the appeal of AWS's artificial intelligence capabilities, is reaccelerating AWS's growth rate. At the current pace, the annual revenue of this business is expected to reach the $100 billion mark. The advertising business is also benefiting from the growth of stores and Prime Video, with "all of our businesses still in the early stages," implying significant future potential.

Cloud revenue accelerates for two consecutive quarters, operating profit margin hits a new high, advertising grows by 24% , no dividend payout yet

Looking at the business segments, core e-commerce sales in the first quarter increased from $51.1 billion in the same period last year to $54.67 billion, a 7% growth. Advertising revenue increased from $9.5 billion in the same period last year to $11.8 billion, a 24% growth. AWS cloud business revenue increased from $21.4 billion in the same period last year to nearly $25 billion, a growth of almost 17%, exceeding the expected $24.5 billion.

In the previous fourth quarter, Amazon's advertising revenue grew by 27% year-on-year to $14.654 billion, marking the fifth consecutive quarter of accelerated growth. AWS revenue grew by 13% year-on-year to $24.204 billion, with AWS's operating profit margin reaching 27% in 2023 This represents the AWS cloud revenue of Amazon in the first quarter, which has accelerated for two consecutive quarters, indicating that the cloud business is improving, in line with the trend of accelerated cloud revenue reported by competitors Microsoft and Google in the first quarter, with Microsoft and Google's cloud revenue growing by 23% and 28% respectively. In the third quarter of last year, AWS revenue growth ended a six-quarter slowdown, returning to accelerated expansion for the first time since the fourth quarter of 2021.

The demand for generative artificial intelligence tools and services is driving the business development of all cloud providers. In the first quarter of this year, AWS operating profit margin reached 37.6%, hitting a historical high, higher than the 30.3% and 29.6% in the third and fourth quarters of last year, recovering to normal after three consecutive quarters of year-on-year decline starting in late 2022.

AWS brought in $9.4 billion in operating profit in the first quarter, far exceeding the expected $7.5 billion, an 84% year-on-year increase, accounting for 61.4% of total operating profit. Most of Amazon's revenue comes from its core e-commerce business, but cloud computing AWS and advertising contribute most of the profit. At the same time, the international business has turned losses into profits, having operated at a loss of over $400 million in the fourth quarter of last year and $1.2 billion in the first quarter of last year.

Analysts also point out that the advertising business has been the fastest-growing department in Amazon's revenue for several consecutive quarters. The company began selling ads on Prime Video membership streaming services in January this year, which will be closely watched for its contribution to profit growth. Previously, most of Amazon's advertising revenue came from the sale of ad placements on the e-commerce marketplace platform.

In addition, revenue from third-party seller services, including commissions, fulfillment fees, shipping fees, and other charges collected by Amazon, continued to surge, with first-quarter revenue growing by 16% to $34.5 billion, slightly below the market's expected $34.63 billion.

Amazon has indeed not announced following Meta and Google in issuing its first-ever dividend. Amazon is the last major tech company that has not yet paid dividends to shareholders.

What to watch? Artificial intelligence, advertising, profit, and whether it is the first dividend payout

Analysts will focus on the main drivers of Amazon's profit—whether the advertising and cloud computing businesses can withstand the challenge of slowing expenses and achieve sustained growth, and will also pay attention to the company's capital expenditure trends in investing in artificial intelligence, which will impact free cash flow.

Amazon has stated that its goal for 2024 is to improve efficiency and profitability, and strategic investments in warehouse robot automation are also worth noting. Currently, the company has deployed over 750,000 robots in fulfillment centers, which has driven fulfillment costs to grow at a rate lower than overall revenue growth The CEO has promised to further reduce costs related to Amazon's internal fulfillment architecture and inventory configuration this year.

The growth engine of artificial intelligence planning is bound to become the focus of financial reports for all major tech stocks. After Meta significantly raised its capital expenditure expectations for the year, its stock price plummeted by double digits, indicating that investors are starting to lose patience with heavy AI investments in the coming years.

Cloud providers led by Amazon are heavily investing in expanding artificial intelligence capabilities, including purchasing advanced chips and building new data centers. Both Microsoft and Google have stated that they are investing more funds in building artificial intelligence data centers.

Amazon positions itself as a leader in artificial intelligence and anticipates that AI will bring in potential revenues of hundreds of billions of dollars for its cloud business. CEO Andy Jassy stated in a shareholder letter released in April, "Generative AI may be the biggest technological revolution since (the early stages of) the cloud, or even the internet."

Wall Street is also watching whether Amazon can continue to improve the profitability of its massive retail business, the impact of recent price increases on third-party sellers, the potential for billions of dollars in additional revenue from the launch of ads on Prime Video, and ongoing workforce reductions for efficiency. Jassy believes that Prime Video will grow into a large and profitable business on its own, with streaming ads growing rapidly and off to a good start.

Currently, Amazon Web Services (AWS) holds about 30% of the cloud market share, ranking first, followed by Microsoft Azure and Google Cloud. Amazon's advertising business holds a market share of nearly 15%, ranking third, behind long-time digital advertising leaders Google and Meta. Meanwhile, competition in the domestic retail industry in the United States is becoming increasingly fierce, with Chinese cross-border e-commerce platforms such as Temu and Shein posing significant threats to Amazon's profits.

In addition, following Meta and Google's dividend announcements earlier this year, the market is highly focused on whether Amazon will also issue dividends for the first time, as Amazon is the last major tech company that has not paid dividends to shareholders. Since spending $3.3 billion on stock buybacks in June 2022, Amazon has been quiet, and any updates could potentially drive the stock price higher.

Some analysts believe that issuing dividends is both a sign of a company entering maturity and a way to effectively divert investors' attention from massive capital expenditures. Dividend payouts often signify the end of a company's high-growth years, but the AI business may disrupt this pattern.

However, New Street Research believes that Amazon is unlikely to issue dividends and will focus on the remaining $6.1 billion in stock buyback authorization. At the same time, providing funding for AI will push the company's capital expenditures higher than market consensus expectations.

How does Wall Street view this?

In September last year, Amazon launched Amazon Bedrock AI services, allowing customers to build generative AI applications using Anthropic, Stability AI, and Amazon's existing large language models In March this year, Amazon increased its investment in the artificial intelligence startup Anthropic by $2.75 billion, bringing the total investment to $4 billion. The company also laid off employees in the slowing growth AWS department, terminated the cashier-free checkout system at the US fresh supermarket Amazon Fresh, and launched a new daily miscellaneous delivery subscription service.

Evercore ISI believes that starting in January this year, advertising on Prime Video has huge growth potential. Amazon's vast resources, large amount of consumer data, and the extensive influence of Prime Video may be factors driving the expansion of the new advertising platform.

UBS pointed out that as AWS revenue becomes more stable, investors are expanding their focus to the retail market platform business and operating profit, "rather than narrowly focusing on AWS growth." It is expected that AI assistance and same-day delivery will accelerate the development of Amazon's e-commerce business. Amazon announced this week that it has already set a new record for Prime member delivery speed in the first three months of this year, breaking the previous record high set for 2023.

Goldman Sachs stated that resilient retail demand, expected growth in AWS and advertising revenue, make Amazon the "preferred" e-commerce stock. Otherwise, due to a series of unfavorable factors facing the industry, Goldman Sachs was originally cautious about e-commerce stocks overall. Bank of America also stated that the expanding retail profit margin, positive progress in AWS and advertising revenue are the main driving factors for Amazon's stock price.

Wells Fargo believes that 2024 will be a year of cyclical recovery, with enterprise artificial intelligence possibly receiving more attention in 2025/2026. Needham stated that Amazon will be among the top 2 to 3 biggest winners in the AI competition, as it is developing custom generative AI chips, which could be a huge catalyst for the stock price in the coming years, but soft consumer demand and intensified competition are the main risks.

Wedbush believes that generative AI cloud services will bring Amazon billions of dollars in incremental revenue in the coming years. "AWS remains the primary beneficiary of generative AI, in a favorable position across all layers of solutions." Once Prime Video advertising is globally promoted, it could generate approximately $6.5 billion in revenue, with almost all surveyed advertisers planning to increase their advertising budget on Amazon.

Jefferies believes that Amazon has entered a "harvest mode" in terms of cost reduction, with opportunities for profit expansion in the coming years. This is due to continued focus on improving the efficiency of various business departments, as well as the accelerated growth of the highest profit margin businesses AWS and advertising