/Amazon_com%20Inc_%20storefront%20by-%20%20Markus%20Mainka%20via%20Shutterstock.jpg)
Amazon (AMZN) stock is trading sharply higher today after reporting better-than-expected earnings for the September quarter, even as Apple (AAPL) is in the red, despite beating consensus estimates and pointing to strong early demand for its iPhone 16. The two “Magnificent 7” peers stepped into the confessional on the heels of Thursday's broad-based tech sell-off following tepid earnings from Microsoft (META) and Meta Platforms (META).
As we noted in the pre-earnings analysis, Apple’s rich valuations left little room for error, and while the earnings were good per se, they were not enough to trigger a rally. Amazon, on the other hand, is eyeing record highs, despite guiding below Street estimates for the fourth consecutive quarter. So, is it too late to buy Amazon stock after the post-earnings pop? We’ll discuss in this article, beginning with an overview of its Q3 performance.
Amazon Reported Better-Than-Expected Q3 Earnings
Amazon’s Q3 revenues increased 11% YoY to $158.9 billion, and came in ahead of Street estimates. The company managed to grow its top-line by double digits, thanks to a 19% rise in revenues from its enterprise-focused Amazon Web Services (AWS). While the company’s cloud growth continues to trail that of Microsoft and Alphabet (GOOG), it is coming from a much higher base. Amazon’s digital advertising business reported a 19% YoY rise in revenues, which was in line with estimates.
The company’s operating income was $17.4 billion, up from $11.2 billion in the corresponding period last year. As has been the case historically, AWS contributed the bulk of Amazon’s profit pool, with operating income rising to $10.4 billion from $7 billion in Q3 2023. The company’s North America segment posted an operating profit of $5.7 billion, while the metric stood at $1.3 billion for its International segment.
Amazon’s Revenue Guidance Fell Slightly Short
Amazon forecast Q4 revenues between $181.5 billion and $188.5 billion, which implies a YoY growth of between 7%-11%. At the midpoint, the company’s guidance fell short of what analysts were modeling. However, its operating income guidance of between $16 billion-$20 billion was ahead of Street estimates at the midpoint.
Notably, while Amazon’s top-line growth has slowed down, and the company is barely managing double-digit revenue growth, its operating profits and free cash flows have been quite healthy – thanks to relentless cost cuts over the last few quarters.
Amazon reported trailing 12-month free cash flows of $47.7 billion at the end of September, which is over twice what it generated in the corresponding period last year. Importantly, its free cash flows have stayed strong, despite higher capex towards artificial intelligence (AI).
CEO Andy Jassy Sounded Upbeat on ROI on AI Investments
A section of the market has been apprehensive about tech companies’ ability to make a sufficient return on investment (ROI) on their massive AI capex. Amazon tried to allay these fears, while emphasizing the strong growth that the business is witnessing.
During the Q3 earnings call, CEO Andy Jassy said that AWS’s AI business is at a “multi-billion dollar” run rate and is growing in triple digits, which he said was three times the growth that AWS witnessed at this stage of its evolution. He termed generative AI as a “really unusually large, maybe once-in-a-lifetime type of opportunity."
Responding to a question about the margins in the AI business, Jassy admitted that margins are currently lower compared to what they would be over the long term. He drew an analogy with AWS, where the margin profile was much different in the early days as compared to now, when its operating margins are in excess of 30%.
“I think as the market matures over time, there are going to be very healthy margins here in the generative AI space,” stressed Jassy.
Is It Too Late to Buy AMZN Stock?
If you are a long-term investor, it is still not too late to buy Amazon stock, given the many growth levers that the company has. For instance, its digital advertising business has a decent growth runway as it ramps up ads on Prime. The AI business is also in its early days, and has the potential to be an “AWS-like opportunity” for the company. Amazon's business-to-business (B2B) platform, Amazon Business, is another potential growth driver to watch, and it is already running at a multi-billion-dollar gross revenue run rate.
In terms of profitability, Amazon still has room to increase margins in its North America segment. Also, it expects the margins of its international business to converge toward North America over the long term.
Overall, Amazon offers the potential to grow its top-line by double digits in the foreseeable future, with prospects for margin expansion and strong free cash flows. It trades at a next 12-month (NTM) price-to-earnings (PE) multiple of around 36x, which doesn’t look demanding, especially for those entering the stock for the long haul.
On the date of publication, Mohit Oberoi had a position in: AAPL , AMZN , GOOG , MSFT , META . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
