Amazon Earnings Preview: Steady Cloud Performance, Retail Guidance in Focus

1）Retail Business Outlook: In the context of a slowing US retail consumption environment, what guidance does Amazon provide for future retail revenue, and will this quarter’s retail profits exceed expectations?

2）AWS Cloud Services: Amidst a traditional cloud recovery cycle, how will Amazon Web Services (AWS) perform in terms of growth and profit margins, considering the potential adverse effects of the economic slowdown on cloud services?

Revenue: $148.789 billion, up 10.72% year-over-year

Diluted EPS: $1.04, up 59.61% year-over-year

Net Income: $17.022 billion, up 121.04% year-over-year

Operating Income: $13.723 billion, up 78.67% year-over-year

Amazon's primary business can be divided into two major segments: retail and cloud services.

From a revenue perspective, retail is a significant source, further split into online stores, third-party seller services, subscription services, advertising services, and physical stores. As of Q1 2024, online retail accounted for about 38% of revenue, and third-party seller services for about 24%.

Cloud services are primarily driven by AWS, which boasts a global cloud infrastructure and a robust cloud computing ecosystem, making it a leader in the global cloud market. While the company focuses heavily on the US market, it also serves consumers worldwide.

According to Bloomberg's consensus, Q2 revenue for third-party seller services is expected to reach $36.662 billion, up 13.39% year-over-year, and 5.97% quarter-over-quarter. Online stores are expected to generate $55.541 billion, up 4.86% year-over-year, and 1.59% quarter-over-quarter. Notably, overall growth in the e-commerce segment is anticipated to slow down.

Compared to the previous quarter, the total goods consumption in the US GDP for Q2 did not show significant weakness. On a quarterly basis, total retail sales grew by 0.55% in Q2, indicating a certain level of resilience in the market. Specifically, in terms of online goods consumption, US non-store retail sales achieved a year-over-year growth of 7.91% and a quarter-over-quarter growth of 1.44% in Q2. Although this growth rate is slower than the 9.14% year-over-year growth in the previous quarter, the e-commerce sector remained relatively stable.

However, the monthly retail sales growth rate showed signs of slowing. In terms of retail sales data, April's retail sales decreased by 0.2% month-over-month. Although May saw a slight rebound with a 0.1% increase, this performance was still below the market expectation of a 0.3% growth rate. Additionally, June's data remained unchanged, staying flat compared to May.

According to a report by TD Cowen, in Q2 2024, the number of Prime member households in the US reached 84 million, up 7.69% from 78 million in the same period last year. The growth in Prime membership is closely related to high visit and purchase rates, with 94% of Prime users visiting Amazon every month and 86% making purchases monthly.

During Amazon Prime Day 2024 (July 16-17), US consumers' online sales reached a record high of $14.2 billion, up approximately 11% year-over-year. The strong performance at the beginning of the event was particularly notable, with sales in the first six hours growing by 13% year-over-year, reflecting consumers' high enthusiasm for shopping.

Thanks to fulfillment network reforms, the fulfillment cost rate has continued to improve, which is expected to benefit this quarter as well. Bloomberg's consensus shows fulfillment costs will grow to $22.947 billion, up 7.75% year-over-year, with the cost rate continuing to decline quarter-over-quarter.

Overall, Amazon’s retail business showed signs of slowing growth last quarter. Given the cooling US consumption environment in Q2, market expectations for Amazon’s e-commerce growth have been adjusted downwards. Q2 is expected to remain stable.

Advertising revenue is closely tied to the macroeconomic environment. US consumer spending has shown signs of weakening, cooling overall consumption trends. Google's recent earnings report indicated a slowdown in ad revenue growth, causing concerns for H2.

According to Bloomberg's consensus, Amazon's Q2 ad revenue is expected to reach $12.984 billion, with year-over-year growth slowing to 21.54%, and quarter-over-quarter growth at 9.81%.

Amazon's advertising business model has certain unique characteristics. In a relatively weak macroeconomic environment, as advertisers seek more effective channels, Amazon leverages its vast user data and proximity to end-user shopping needs. This allows for more precise traffic direction and conversion rates, making it highly competitive.

Following the introduction of ads on Prime Video, market expectations for ad revenue growth have increased. In Q1 2024, Amazon introduced ads on Prime Video in the US, potentially reaching 115 million viewers monthly. Assuming 80-90% of users continue with ad-supported services and 10% opt for the $2.99/month ad-free service, this could bring an additional $400 million in subscription revenue.

Q2 ad revenue is expected to be strong, meeting or slightly exceeding expectations. However, the growth rate is anticipated to slow in the second half of the year.

Benefiting from a new cloud computing growth cycle, IDC predicts that global public cloud service revenue will exceed $800 billion in 2024, representing a year-over-year growth of 20.5%, slightly faster than the 19.9% growth in 2023.

Amazon AWS has consistently maintained its leadership position in the cloud infrastructure market. According to Synergy Research Group, AWS held a 31% share of the global cloud infrastructure market in Q1 2024, slightly lower than the 32% share in the same period last year. Meanwhile, AWS's main competitor, Microsoft, is gradually closing the gap with its Azure platform, which reached a historic high market share of 25% this quarter.

According to Bloomberg's consensus, AWS's cloud service revenue for Q2 is expected to reach $25.975 billion, representing a year-over-year growth of 17.32%, roughly in line with last quarter's 17.25% growth, and a quarter-over-quarter growth of 3.75%. From the financial reports already released by Google and Microsoft's cloud businesses, Google's cloud business exceeded expectations and accelerated year-over-year growth in Q2, while Microsoft's Azure and other cloud services showed a slowdown in year-over-year revenue growth. Last quarter, AWS's year-over-year growth rate increased to 17%. Comparing the growth rates of the three major US cloud service providers, Google Cloud Platform (GCP) and Amazon AWS have accelerated faster than Microsoft, narrowing the growth rate gap. This reversal likely reflects Google and Amazon's integration of AI models into their cloud services, rapidly catching up with the leading Microsoft. AWS is expected to continue its strong growth this quarter, meeting expectations.

Last quarter, AWS's actual operating profit exceeded expectations by more than $2.2 billion, with an operating profit margin of 37.6%, an 800 basis point improvement from Q4, being the primary factor for overall outperformance. Much of AWS's profit margin improvement was driven by cost control, increased revenue, and a reduced overall cost structure for the company.

However, due to a significant increase in capital expenditures, most of which will support AWS infrastructure, particularly AI, depreciation expenses are expected to rise, impacting profit margins. According to Bloomberg's consensus, AWS's operating profit margin for Q2 is expected to decline to 32.47%.

Amazon's business growth in Q2 is expected to be steady, but investors should pay more attention to the guidance for the next quarter. Given the cooling trend in the US consumer environment in Q2, the market has already adjusted its expectations for Amazon's e-commerce business growth downward in line with the slower macro consumption growth rate. It is anticipated that Amazon's e-commerce business will meet expectations for Q2. The advertising business is likely to benefit from the introduction of Prime Video ads, which could offset some of the macroeconomic headwinds, potentially leading to better-than-expected performance. In terms of AWS, market share is expected to remain stable. However, increased capital expenditure could impact profit margins, which might see a slight quarter-over-quarter decline.

Currently, Amazon does not have any dividend or share repurchase plans. As the profitability of the e-commerce business improves, free cash flow continues to improve. However, given the significant capital expenditures expected in 2024, the likelihood of a repurchase plan in the short term is low.

Based on the above assessments, this earnings season for tech stocks carries high risks, with the market setting very high expectations due to elevated valuations. Given Amazon's already substantial valuation and the potential for guidance to slow, even if Q2 results meet or slightly exceed expectations, the upside for the current stock price is limited. Conversely, if Amazon cannot provide positive future performance guidance, the stock could face significant downward pressure. Considering the limited upside potential post-earnings, investors holding Amazon shares might consider using a covered call strategy to lock in gains.