Three Key Questions About (AMZN) Earnings in April 2023

Three Key Questions About (AMZN) Earnings in April 2023 (NASDAQ: AMZN) reported solid earnings for Q1 2023 after the market close on Thursday, April 27, 2023. What happened during the release and earnings call, and what are the new questions to focus on?

With total sales coming in at $127.4B and operating profit at $4.8B, AMZN beat their Q1 guidance for revenues of $121-126B and operating profit of $0-4B.

The company released Q2 guidance of $127-133B in revenues and $2.0-5.5B in operating profit, in line with expectations of $130.5B in sales and $4.4B in operating profit. For 2023, analysts have been expecting AMZN to generate $557B in total sales and operating profit of ~$20B.

1. AWS: AWS performance for Q1 was in line with estimates. Analysts had been projecting AWS revenues of $22B in Q2 and operating profit of $5B, resulting in a 23.3% operating profit margin, 50bps below Q1 levels of 23.8%. For H2, analysts had been projecting AWS operating profit margin to exceed 24%. However, the company is seeing that customers want to optimize costs in the cloud, and this may impact the performance of this business going forward.

While the consensus margin is 24% for 2023, there is significant debate about the future performance of the AWS margin. For 2023 and 2024, the range is from a more conservative 21% to a more aggressive 29%. The company highlighted uncertainty in the cloud market outlook and that companies are focused on carefully managing costs.

New Questions: How will cloud optimization evolve over the next few quarters? Will customers further slow the pace of their cloud spend?

2. Advertising: Analysts were expecting Ads to be up 17% year over year and to contribute $9B to Q1 revenues. Going forward, analysts have been expecting this business to grow 16% in Q2 to $10B, and 17% in 2023 to $44B. Expectations for ad revenue by 2024 have been at $50B+, with the most aggressive estimates at close to $70B. The company noted on the call that they are still in the early days in Ads.

New Question: Will AMZN try to increase the pace of its ad revenue growth to offset uncertainty in the cloud business?

3. Costs: Both the North America and International online businesses saw sales and operating profit come in ahead of expectations, delivering margin improvement. The company generated a 1% margin in the North America online business and noted that they are making progress on getting the operating profit margin back to 4-6% pre-pandemic levels, but they still have more to go. Analysts project AMZN’s operating profit margin to return to 5% by 2024.

AMZN has been in cost-cutting mode since the beginning of the year and has eliminated 27K roles. The company has also made significant improvements in optimizing its regional fulfillment centers. Analysts projected a decline in costs in Q1, but are still expecting the company to show headcount growth in Q2 and H2.

New Question: How much additional reduction in headcount and expenses will be needed to improve the margin to pre-pandemic levels?


About Melissa Otto

Melissa spent 20+ years as an equity analyst and portfolio manager. She specialized in covering global technology and consumer stocks and the Pan-Asia region at TIAA/Nuveen. She also managed one of Fidelity's equity research teams as a director of research. In addition to her equity investing career, Melissa worked directly with software engineering teams at Bloomberg, Microsoft, and MSCI building cloud-based solutions to centralize and aggregate critical investment data for investors. Melissa studied Japanese at Harvard University, received her MA in economics from Brandeis University and MS degree from the University of Pennsylvania, and is a CFA charter holder. She is certified in Azure Fundamentals and Agile Project Management.