Three Key Questions About Amazon.com (NASDAQ: AMZN) Earnings in August 2023

Amazon.com (NASDAQ: AMZN) reported earnings for Q2 2023 after the market close on Thursday, August 3, 2023. What happened during the release and earnings call, and what are the new questions to focus on?

With total sales coming in at $134.4 billion and operating profit at $7.7 billion, AMZN beat their Q2 guidance for revenues of $127-133 billion and operating profit of $2.0-5.5 billion.

The company released Q3 guidance of $138-143 billion in revenues and $5.5-8.5 billion in operating profit, ahead of pre-Q expectations of $138 billion in sales and $5.5 billion in operating profit. For 2023, Visible Alpha pre-Q consensus for AMZN ticked up from $557 billion to $562 billion in total sales and operating profit from $20 billion to $22 billion. After the Q2 earnings release, analysts now expect total 2023 revenues of $570 billion and operating profit of $29 billion.

1. Is AWS bottoming?

AWS performance stabilized coming into Q2. The results came in slightly better than expected at $22.1 billion in sales and $5.4 billion in operating profit, resulting in a 24.4% operating profit margin, which was 60 basis points ahead of Q1 levels of 23.8% and 170 basis points ahead of the 22.7% expected according to Visible Alpha consensus. Analysts had been projecting AWS revenues of $22 billion and operating profit of $5 billion in Q2. For H2, analysts had been projecting AWS operating profit margin of 24%.

The consensus margin has increased 40 basis points to 24.4% for 2023, and there is now less debate about the future performance of AWS margin. For 2023 and 2024, the range has narrowed from 21-29% to 23-26.6%. Based on comments from CEO Andy Jassy, the company continues to see that customers want to optimize costs in the cloud. However, Jassy explained that this is beginning to be offset by a shift to new workloads, suggesting a more upbeat outlook for the AWS business.

While AMZN has lagged other big tech players on the AI front, CEO Andy Jassy pointed to adding more CapEx to support Large Language Models (LLM) and Generative AI (GAI). He noted that 90% of IT is still on-premises and more is likely to move to the Cloud with GAI initiatives. Jassy explained that companies will want to leverage LLM, but will need to customize the models and applications for privacy and security. Applications built on top of the LLMs will be key. Plugins available in ChatGPT4 provide a sneak peek into how companies and their customers may see GAI integrated into workflows. It is worth noting that net sales to retail third-party seller services beat by over $1 billion, delivering $32.3 billion. This business line may be one area that will benefit from GAI.

New Question: When will customer optimization wind down and shift fully to new workloads over the next few quarters?

2. Is the advertising business continuing to show growth?

Analysts had been expecting the Ads business to grow 16% in Q2 to $10 billion, and 17% in 2023 to $44 billion. Amazon delivered a nice beat with $10.7 billion, up 22% year-over-year. Expectations for ad revenue by 2024 have been at $50 billion and have now increased to $54 billion, with the most aggressive estimates at close to $60 billion, down from $70 billion in Q1. The company reiterated that they are still in the early days for Ads.

New Question: How significantly will brand/product search continue to help grow ad revenues at AMZN going forward?

3. What’s supporting Amazon’s margin improvement?

Both the North America and International online businesses saw sales and operating profit come in ahead of expectations, delivering margin improvement. The company generated significant margin improvement, going from 1% in Q1 to 4% in Q2, in the North America online business, and noted that the operating profit margin has returned to 4-6% pre-pandemic levels, but they still have more to go. Analysts project AMZN’s North America operating profit margin to be 3.7-3.8% for H2, leading to an expected 3.2% in 2023. By the end of 2024, analysts expect a further 100-basis-point margin expansion in North America to 4.2%

The company has made significant improvements in optimizing its regional fulfillment centers and these are projected to continue to enhance margins. In addition, the company is also finding more efficiencies to support margin growth. Driven by improvements in the North America online business and stability in AWS, analysts project AMZN’s total operating profit margin to return to 5% in 2023, more than double 2022’s 2.4% level, and to rise to 6.4% by the end of 2024.

New Question: Will Amazon be able to generate a 10% operating profit margin in 2026?