Amazon Q2 FY24 Earnings Review:Will Amazon Sustain Profit Surprises Amid Shifting Consumer Trends?
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On August 1st, after the US stock market closed, $Amazon (AMZN.US)$ announced its 24Q2 performance. Amazon's total revenue in the second quarter reached $148 billion, a year-on-year increase of 10%, lower than Bloomberg's consensus expectation of $148.78 billion. At the same time, due to the upper limit of the revenue guidance for the third quarter meeting market expectations, but the upper limit of Operating Profit was slightly lower than market expectations, the stock price fell sharply after the results.
Preface: Amazon Business Overview
Amazon's primary business segments can be divided into two main categories: retail operations and cloud services.
Figure: 2024 Q1 revenue breakdown
Figure: 2024 Q1 revenue breakdown
![Source: Moomoo](https://ussnsimg.moomoo.com/sns_client_feed/71349426/20240802/b695ff63d86ec27d95abe44982662558.png/big?area=100&is_public=true)
Amazon's business can be categorized into retail and cloud services. From a revenue structure perspective, retail operations are a significant source of income for the company and can be further subdivided into online retail, third-party retail, membership and subscription services, online advertising, and offline self-operated retail. Cloud services are mainly represented by AWS, which boasts a global cloud infrastructure and a robust cloud computing ecosystem, positioning it as a leader in the global cloud computing market.
Figure: Amazon Business Overview
Figure: Amazon Business Overview
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Source: Company announcement
Retail Performance Impacted by Adverse Macro Consumer Environment
1. International Business Affected by Adverse Currency Fluctuations
From a market perspective, the North American retail segment grew by 9.1% year-on-year, slightly exceeding expectations, while the international retail segment grew by 6.6%, below the expected 11%.
From a market perspective, the North American retail segment grew by 9.1% year-on-year, slightly exceeding expectations, while the international retail segment grew by 6.6%, below the expected 11%.
Currency fluctuations adversely impacted Amazon's revenue and profit, especially in its international business. Amazon faced approximately $1 billion in negative impact this quarter due to currency changes, which is about $700 million higher than the $300 million anticipated in the second-quarter guidance. Excluding currency impact, international retail business growth would slightly decrease from 11% to 10%, showing a stable yet slightly declining trend.
2. E-commerce Business Shows Noticeable Slowdown in Year-on-Year Growth
In the second quarter, both the online retail business and third-party retail business slightly underperformed expectations. Online retail revenue was $55.39 billion, up 4.6% year-on-year, compared to the expected growth rate of 4.9%. Third-party retail revenue was $36.2 billion, up 12% year-on-year, compared to the expected growth rate of 13.4%. Year-on-year growth for both segments noticeably slowed compared to the first quarter, which had year-on-year growth rates of 7% and 16%, respectively.
Figure: Amazon E-commerce Business Year-on-Year Growth (%)
2. E-commerce Business Shows Noticeable Slowdown in Year-on-Year Growth
In the second quarter, both the online retail business and third-party retail business slightly underperformed expectations. Online retail revenue was $55.39 billion, up 4.6% year-on-year, compared to the expected growth rate of 4.9%. Third-party retail revenue was $36.2 billion, up 12% year-on-year, compared to the expected growth rate of 13.4%. Year-on-year growth for both segments noticeably slowed compared to the first quarter, which had year-on-year growth rates of 7% and 16%, respectively.
Figure: Amazon E-commerce Business Year-on-Year Growth (%)
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Source: Company announcement
On a quarterly basis, total retail sales in the second quarter grew by 0.55% quarter-on-quarter, maintaining some resilience in the broader market. In online product consumption, U.S. non-store retail sales grew by 1.44% quarter-on-quarter and 7.91% year-on-year in the second quarter. Amazon's performance in the second quarter aligned with the overall online retail market, with online retail and third-party retail growing by 1.3% and 4.6% quarter-on-quarter, respectively.
However, there are signs of slowing growth in retail sales on a monthly basis. Retail sales data showed a 0.2% decline in April, a slight rebound of 0.1% in May, which was still below the market expectation of 0.3%, and no change in June compared to May.
Figure: U.S. Retail Sales Monthly Rate
On a quarterly basis, total retail sales in the second quarter grew by 0.55% quarter-on-quarter, maintaining some resilience in the broader market. In online product consumption, U.S. non-store retail sales grew by 1.44% quarter-on-quarter and 7.91% year-on-year in the second quarter. Amazon's performance in the second quarter aligned with the overall online retail market, with online retail and third-party retail growing by 1.3% and 4.6% quarter-on-quarter, respectively.
However, there are signs of slowing growth in retail sales on a monthly basis. Retail sales data showed a 0.2% decline in April, a slight rebound of 0.1% in May, which was still below the market expectation of 0.3%, and no change in June compared to May.
Figure: U.S. Retail Sales Monthly Rate
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Source: Investing
The slowdown in Amazon's retail business is mainly due to the overall macro consumer environment. From management's conference call, it was noted that Amazon Prime membership growth and increased shopping frequency indicate that despite the slowdown, the company still maintains growth momentum in key areas. However, consumer caution amid economic uncertainty and a lack of consumer confidence are likely to continue impacting retail business growth in the third quarter.
Figure: Consumer Confidence Index
The slowdown in Amazon's retail business is mainly due to the overall macro consumer environment. From management's conference call, it was noted that Amazon Prime membership growth and increased shopping frequency indicate that despite the slowdown, the company still maintains growth momentum in key areas. However, consumer caution amid economic uncertainty and a lack of consumer confidence are likely to continue impacting retail business growth in the third quarter.
Figure: Consumer Confidence Index
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Source: Moomoo
3. Advertising Business Underperforms
In the second quarter, advertising net sales were $12.77 billion, up 19.5% year-on-year, but below Bloomberg's consensus expectation of 21.5%. After announcing the launch of advertising business on Prime Video, market expectations for subsequent advertising growth increased.
Advertising business is typically closely tied to macroeconomic conditions. Compared to the previous quarter, U.S. consumer spending willingness has weakened, and overall consumption trends show a cooling trend. Google's recent earnings report also indicated a slowdown in Google Ads growth, with YouTube ads falling short of expectations, raising market concerns about advertising revenue growth in the second half of the year.
From a long-term perspective, Amazon's advertising revenue growth has shown signs of slowing since the fourth quarter of 2023, and it is expected that growth will continue to slow in the second half of the year.
Figure: Advertising Revenue (Million USD) and Year-on-Year Growth (%)
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Source: Company announcement
AWS Growth Accelerates, Profit Exceeds Expectations
AWS achieved revenue of $26.28 billion in Q2, an increase of 18.7% YoY, exceeding Bloomberg's consensus expectation of $25.98 billion, growing from 17.2% in Quarter 1 to 18.7% in Q2. AWS's growth continues to benefit from the recovery cycle of the overall Cloud as a Service business, reinvestment after enterprise cost optimization, and AI investment.
Figure: AWS Revenue (Million USD) and YoY Growth (%)
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Source: Company announcement
From the perspective of Google and Microsoft's cloud businesses that have released financial reports, Google's cloud business exceeded expectations in the second quarter, with a year-on-year growth rate of 29%, accelerating year-on-year; while Microsoft Azure's revenue growth rate slowed from 31% in the previous quarter to 29%, lower than market expectations.
From the perspective of Google and Microsoft's cloud businesses that have released financial reports, Google's cloud business exceeded expectations in the second quarter, with a year-on-year growth rate of 29%, accelerating year-on-year; while Microsoft Azure's revenue growth rate slowed from 31% in the previous quarter to 29%, lower than market expectations.
According to data from Synergy Research Group, in Quarter 1 of 2024, Amazon AWS has consistently held the leading position in the cloud infrastructure market, with a global market share of 31%, slightly lower than the 32% in the same period last year. However, in a Horizontal comparison of the three major US Cloud as a Service providers, it can be seen that the growth acceleration of Google GCS and Amazon AWS in the last quarter was faster than that of Microsoft, and the gap in growth rate narrowed.
Figure: Cloud Services Market Share 2024Q1
Figure: Cloud Services Market Share 2024Q1
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Source: Synergy Research Group
AWS achieved $9.30 billion in operating profit, with an operating profit margin of 35.4% in the second quarter, well above Bloomberg's consensus expectation of $8.40 billion. AWS adjusted the estimated service life of servers in Quarter 1, which had a positive impact on operating profit margin of about 200 basis points in the second quarter. And strengthened cost control, such as slowing down recruitment speed.
Figure: AWS Operating Profit (Million USD) and Profit Margin (%)
AWS achieved $9.30 billion in operating profit, with an operating profit margin of 35.4% in the second quarter, well above Bloomberg's consensus expectation of $8.40 billion. AWS adjusted the estimated service life of servers in Quarter 1, which had a positive impact on operating profit margin of about 200 basis points in the second quarter. And strengthened cost control, such as slowing down recruitment speed.
Figure: AWS Operating Profit (Million USD) and Profit Margin (%)
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Source: Company announcement
In the first half of this year, capital expenditures were $32.50 billion. Amazon expects capital investment in the second half of 2024 to be higher than in the first half, mainly to support the growth demand of AWS infrastructure. Increasing capital expenditures is expected to increase depreciation expenses, which will have a certain impact on profit margins.
Profit margin and expense control perform well
The overall operating profit margin for the second quarter was 9.9%, slightly lower than the previous quarter, but better than expected. The operating profit of the North American division was $5.10 billion, an increase of $1.90 billion year-on-year. The operating profit margin was 5.6%, an increase of 170 basis points year-on-year and a decrease of 20 basis points quarter-on-quarter. The profitability of the North American core store business actually improved again quarter-on-quarter. Due to logistics reforms, inventory became more regionalized and closer to customer locations, so service costs continued to improve. The reason for the slight decrease in the overall operating profit margin was the increase in spending in some investment areas, including Kuiper, in the second quarter. Amazon began manufacturing satellites and plans to launch them in space in the fourth quarter.
Figure: Operating Profit (Million USD) and Profit Margin (%)
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Source: Company announcement
The international department achieved profitability again in the second quarter, with an operating profit of $270 million and an operating profit margin of 0.9%, a year-on-year increase of 390 basis points. This growth is mainly due to the improved cost structure of business in mature countries/regions through better inventory allocation and more concentrated shipments. Emerging countries/regions continue to expand their product range and invest in expanding Prime benefits. It is expected that the profit margin level in developed markets such as Europe will continue to improve in the future and generally achieve profitability.
In summary, from the perspective of cost and expenses, what are the main reasons for the weak revenue and profit exceeding expectations in this quarter? The gross profit margin for this quarter was 50.1%, a year-on-year increase of 1.76%, which was much higher than Bloomberg's consensus expectation. The main reasons are the unexpected profit increase of AWS business mentioned earlier, and the increase in the proportion of revenue from high-margin businesses such as advertising. On the expense side, the combined R & D, sales, and internal management fees decreased by 3.0% year-on-year, and the trend of expense control and optimization continues.
Figure: Quarterly Gross Margin (%)
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Source: Company announcement
Summary
The performance in the second quarter was mixed. AWS business grew strongly, while the performance on the profit side exceeded expectations. However, due to the adverse impact of the macro consumer environment, the performance on the revenue side was weak, and the profit side also decreased compared to the previous quarter. However, the market is more concerned about the Q3 guidance. Based on the guidance range, Amazon expects Q3 revenue to increase by about 8% to 11% YoY, between $154 billion and $158.50 billion. It is expected that Q3 operating profit will be between $11.50 billion and $15 billion. The upper limit of next quarter's revenue guidance guidance is in line with market expectations, but the upper limit of Operating Profit is slightly lower than market expectations. If calculated at the low end of profit and revenue guidance, this means that the profit margin in the next quarter may further contract.
From this perspective, in the third quarter, Amazon is facing a slowdown in the growth rate of its e-commerce and advertising businesses due to the slowdown in consumption. On the other hand, due to the expansion of capital expenditures on AI and the increase in expenditures in some investment areas, including Kuiper, it is expected to have an adverse impact on profit margins. The phase of significantly releasing profits beyond expectations in the past few quarters may come to an end.
Amazon currently has no dividend or buyback plan. With the release of profits from the E-Commerce business, free cash flow continues to improve. However, considering that there are still many capital expenditures in 2024, the possibility of a buyback plan is small in the short term. Under the condition of slowing growth in the future, the pressure of overvaluation under the current stock price is greater. Considering that the upward space of the current stock price may be limited, investors who hold the underlying stock can use covered call, and investors who do not hold the underlying stock can wait for the valuation to return after the stock price corrects.
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