Amazon's Q3 Earnings Beat Estimates; Executives Optimistic on Increased CapEx
$Amazon (AMZN.US)$ reported better-than-expected third-quarter earnings after the market closed on Thursday.
Amazon's Q3 net sales rose 11% from a year earlier to $158.9 billion, surpassing the $157.29 billion estimate. For Q4, Amazon forecasts net sales between $181.5 billion and $188.5 billion, indicating a 7% to 11% growth. The midpoint of $185 billion slightly trails the $186.2 billion predicted by analysts.
Operating income for Q3 jumped 55.6% to $17.41 billion, outpacing the $14.75 billion market forecast and Amazon's upper guidance of $15 billion. The company's emphasis on efficiency and cost-cutting continues to bolster profitability. Amazon anticipates Q4 operating profit between $16 billion and $20 billion, up from $13.2 billion a year prior, with the $18 billion midpoint exceeding analysts' $17.5 billion expectation.
AWS Growth Momentum Continues, Boosting Overall Profit Margins
Amazon Web Services' (AWS) revenue climbed 19% year-over-year to $27.45 billion, with growth edging up from the previous quarter. Microsoft’s Azure and other cloud services posted a 33% increase, while Alphabet’s Google Cloud revenue soared 35%.
AWS operating profit margin reached a record 38.1%, rising from 35.5%, buoyed by continued cost controls. These measures included a cautious hiring strategy, enhanced infrastructure efficiency, and cost reductions. Amazon’s overall operating profit margin hit 11%, exceeding the prior peak of 10.7% in Q1.
Advertising Revenue Surges, Poised for Further Growth
Advertising revenue jumped 19% year-over-year to $143 billion, driven by sponsored ads and Prime Video, the company said. Meta reported an 18.7% increase in ad revenue over the same period, while Google's ad business saw a 15% rise this quarter.
During a conference call, executives expressed satisfaction with the growth in their advertising operations. They emphasized Amazon's vast reach, closed ecosystem, and extensive purchasing data as pivotal for enabling large-scale omnichannel advertising.
Prime Video advertising, entering its first broadcast season, will continue to support brands utilizing generative AI creative tools. Launched in the first quarter of fiscal 2024, Prime Video ads reach 180 million U.S. users, potentially positioning Amazon as a substantial ad-supported streaming platform. According to Nielsen, Amazon holds a 3.1% share of total U.S. TV viewership.
"While we're generating a lot of advertising revenue today, there remains considerable upside," management noted.
Retail Sector Outperforms Forecasts
Online stores posted a 7.2% year-on-year increase this quarter, bringing total sales to $61.4 billion, marking a notable uptick from the previous quarter. Retail Third-Party Seller Services surged 10.3% to $37.864 billion.
In North America, revenue advanced 9% from the same period last year, with operating income soaring 31% to $5.663 billion. Internationally, revenue climbed 12% year-on-year, turning a $95 million loss into a $1.301 billion profit. North America's international division has now recorded operating margin growth for seven consecutive quarters.
“We made strides in enhancing our fulfillment network cost structure in the third quarter, partly due to improved inventory placement,” said CFO Brian T. Olsavsky.
AI Initiatives Propel Surge in Capital Expenditure
Amazon's capital expenditure in the third quarter jumped 81% year-over-year, increasing from $12.5 billion to $22.6 billion.
CEO Andy Jassy revealed on the earnings call that the company plans to allocate around $75 billion for capital spending in 2024, with expectations for even more in 2025. The bulk of this investment targets AWS, fueled by the surge in generative AI.
“Our AI business is a multibillion-dollar enterprise growing at triple-digit rates annually,” Jassy said. “It represents an extraordinarily large, potentially once-in-a-lifetime opportunity. I believe our customers, the business, and our shareholders will appreciate our aggressive pursuit of this in the long term.”
Analysts Bullish on Amazon
Goldman Sachs, JPMorgan, and UBS are among the Wall Street banks that raised their price targets for Amazon after the company's earnings report.
Goldman Sachs raised its price target on Amazon to $240 from $230, reiterating a Buy rating. The firm says Amazon will "compound a mix of solid" consolidated revenue growth and operating margin expansion on a multi-year view while also making critical investments in long-term growth initiatives.
Amazon remains JPMorgan’s top internet stock pick. JPMorgan analyst Doug Anmuth raised his price target on Amazon to $250 from $230, maintaining an Overweight rating. Anmuth cited Amazon’s strong third-quarter results and positive outlook for the fourth quarter, with increases in both revenue and operating income. He highlighted that Amazon’s everyday essentials, when ordered in bulk and delivered via its efficient same-day network, can be as profitable as other offerings.
UBS analyst Stephen Ju increased Amazon's price target to $230 from $223 while maintaining a Buy rating. Post-earnings, UBS highlighted Amazon's potential for sustained margin expansion, citing effective management of headcount and operating expenses. The firm expressed confidence in the durability of Amazon's margin growth in a research note to investors.
Source: CNBC, Bloomberg, TheFly
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