/amazon%20holiday%20delivery%20boxes%20by%20Cineberg%20via%20iStock.jpg)
Amazon (AMZN) released its fourth-quarter earnings yesterday after the markets closed. As has been the case for the last couple of quarters, the company’s guidance spooked investors. The low end of the guidance implies revenue growth of a mere 5% year-over-year in Q1 which would be the slowest growth on record. The upper end of the range fails to instill confidence either at 9% growth. Analysts expected the company’s revenues to rise in the low double digits in the current quarter. Meanwhile, Amazon upped its 2025 capex budget as it continues to invest aggressively in artificial intelligence (AI).
In this article, we’ll discuss whether Amazon’s slowing growth should scare you or whether it is worth buying the stock for the AI opportunity. Let’s begin by looking at a snapshot of the company’s Q4 earnings.
Amazon’s Q4 Earnings
Amazon’s Q4 revenues rose 10% YOY to $187.8 billion which was slightly ahead of estimates. The company’s operating income rose to $21.2 billion, a new quarterly record. It posted a net profit of $20 billion in the quarter which was almost twice what it generated in the prior-year period. Revenues of Amazon’s Amazon Web Services (AWS) came in at $28.8 billion – up 19% YOY but barely in line with estimates. Advertising revenues grew 18% YOY to $17.3 billion but fell slightly short of the $17.4 billion that analysts were expecting.
Amazon Ups 2025 Capex Budget Amid Growing AI Investments
Amazon expects its 2025 capex to be in the ballpark of $100 billion - significantly higher than its $83 billion capex in 2024. CEO Andy Jassy reiterated his previous views and termed AI a “once-in-a-lifetime type of business opportunity.” He was however cognizant of the apprehensions that the market has regarding tech companies’ burgeoning AI capex taking a toll on the short-term profitability and pitched it as a long-term investment. “I think that both our business, our customers and shareholders will be happy, medium to long term, that we’re pursuing the capital opportunity and the business opportunity in AI,” stressed Jassy during the earnings call.
Meanwhile, markets have been worried about tech companies’ rising capex and slowing growth. We saw pretty much the same theme play out during the December quarter earnings of Alphabet (GOOG), Meta Platforms (META), and Microsoft (MSFT) as well.
Can Amazon’s Growth Revive?
While Amazon’s Q1 revenue guidance fell short of estimates, it was partially due to a stronger dollar, which has been a headwind for U.S. companies with a global footprint. Despite providing soft guidance, there is much to be bullish on with Amazon. The company remains a margin expansion story, and the operating margins at both its North American and International segments have increased for eight consecutive quarters. It has also lowered its cost to serve customers on a per-unit basis for two years and sees room to cut costs further. While it admitted that the results won’t be linear, CFO Brian Olsavsky said, “We have a good plan to continue to drive improvements in our cost structure.”
While Amazon’s AWS and advertising business – both of which have been growing at a much faster pace than the e-commerce business – continue to grow rapidly in absolute dollar terms, the growth in percentage terms has been tepid as it's arguably coming from a higher base. The company sees AWS as capacity-constrained in its AI business and believes that these constraints will “start to relax” in the back half of the year. In the digital advertisement business, Prime ads will be a key driver in the next few years as the company ramps up ads on the ad-supported tier. As for the e-commerce business, the company is taking several initiatives like expanding in rural areas and focusing on the quick delivery segment with Amazon Air where it delivers orders within an hour through drones.
Last year, Amazon launched its low-cost Haul platform to take on the likes of Temu and Shein. Haul should help the company increase its market reach further, and while I would have liked to hear a bit more on that during the earnings call, Jassy said “It's off to a very strong start."
Overall, while Amazon’s growth might remain tepid in the short term, the company’s long-term outlook looks quite positive. Given the stock’s reasonable valuations – it trades at around 33x its expected earnings over the next 12 months – I would continue to remain invested in AMZN.
