Amazon Impresses Again with Strong Q3 2023 Results & Cloud Stabilization

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Enhanced Profitability

Similar to most tech giants, Amazon.com expanded rapidly during the pandemic boom, but was forced to rationalize its expenses after the 2022 reckoning. Responding to the adverse impact of high inflation, tight monetary policy, economic uncertainty and other factors, the firm slashed costs and laid-off staff.

Those efforts along with an improving external environment have helped a notable boost to its bottom line. Building on the recent rebound, Amazon's Q3 Net Income more than tripled from a year ago, to $8.879 billion and the highest in over two years. Operating Income soared around 350% y/y to $11.2 billion and its Margin widened substantially to 7.8%, the best performance since Q1 2021. [1]

It top line also improved, likely helped by July's Prime Day sales event, which was "the biggest Prime Day event ever", with more than 375 million items purchased [2]. The firm generated Sales of $143.083 billion in Q3, up 11% y/y. It expects to achieve new all-time highs in the fourth quarter, projecting revenues of $160-$167 billion.

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Improved Advertising

The advertising industry suffered against an adverse environment last year, but has shown signs of improvement over recent quarters. This was evident in Wednesday's blockbuster results of Meta and other tech companies, like Alphabet and Snap.

Amazon's had been resilient during the rough patch and Wednesday results showed an acceleration. It reported a 26% y/y increase in ad sales, which generated $12.06 billion. CEO Andy Jassy took note of the performance, saying that advertising revenue "grew robustly". During the earnings call, he acknowledged that there are still challenges for the market and elaborated that "a lot of strength" is seen on lower-funnel ad products, which target people more likely to buy. [3]

Cloud Stabilization

After the previous report, I had noted the underwhelming performance of Amazon's cloud business. It is the biggest player in the space, but its market share has been stagnating in the 32-34% region, as Microsoft and Google expand their footprint, according to data from the Synergy Research Group. [4]

The cloud business has become increasingly important after the pandemic breakout and the Artificial Intelligence revolution, has made it even more crucial. Microsoft reported a 19% y/y growth in its Intelligent Cloud segment in Q3 on Wednesday, boosted by increased Artificial Intelligence workloads.

Despite rising sales, Amazon's Web Service (AWS) have been decelerating for the past six quarters, but yesterday's results showed stabilization, steadying at 12% y/y growth. The segment operating income jumped 29% y/y, to roughly $7 billion.

During the earnings call, the CEO mentioned "elevated" cost optimization, a term also used by his Microsoft and Alphabet counterparts, to describe clients' efforts to rein in their cloud spending. However, he spoke of a strong couple of months and a pick up in the pace and volume of closed deals. [3]

AI Advance

OpenAI sparked a Generative Artificial Intelligence arms race after the launch of ChatGPT, its conversational chatbot, nearly a year ago. Microsoft and Alphabet have become key contenders, as they unveiled similar services and weave the technology into many of their products. Chip designer NVIDIA reaps the benefits, since its GPUs are the go-to solution for the development and deployment of such applications.

This week's results from Microsoft and Meta Platforms, showed how Artificial Intelligence is already changing the cloud and advertisement business and that tech giants can't afford to stay on the sidelines of this revolution.

Amazon.com seemed to be taking a backseat approach at the beginning, but recently stepped up its AI game, with its stake in Anthropic, developer of ChatGPT rival Claude. The CEO highlighted the firm's AI progress on all aspects of its business, including advertising and cloud. Mr Jassy said that the number of companies building generative AI apps in AWS is "substantial and growing very quickly". [3]

Streaming Progress

The tech giant has also thrown its hat into the streaming arena, with Prime Video, leveraging its large Prime members pool. It is making strides with strong original content and also offers live sports, the increasing importance of which i have underscored repeatedly. Streaming leader Netflix lacks live sports, but it is testing the waters. Amazon said it attracted 15.1 million viewers for the Thursday Night Football (TNF) season opener.

The company also recently announced that its service will include commercials, starting from early 2024. The advertisement-free option will start at $2.99/month for US Prime members, with pricing for other countries to follow at a later stage. The launch of ad-supported tiers have already produced positive results for streaming giants Netflix and Disney, but Amazon intends to have "meaningfully fewer ads' than its competitors. [5]

Amazon does not disclose the exact the number of people using its streaming service, nor its financials. However during the earnings call, its CEO said that it is "often one of the top 2 drivers of customers signing up for Prime", and spoke of increasing conviction that Prime video can be "a large and profitable business in its own right". [3]

Conclusion

Amazon.com posted another blowout quarter, continuing its turnaround from the hardships the past year. Its profitability surged further and its advertising business is one of the highlights, while the increasingly important cloud business showed signs of stabilization. It is also making progress on the make-it-or-break-it AI front. Markets reacted positively to the results, as its stock was up in Thursday's pre-market

On the other hand, AWS is stagnant, while competitors increase their market share. What appeared to be a slow AI start, could create a handicap, with rival Microsoft already tying its cloud revenue growth to AI demand. Furthermore, the ecommerce giant continues to face regulatory scrutiny and a potential existential threat from the FTC's anti-trust lawsuit. [6]

Nikos Tzabouras

Senior Financial Editorial Writer

Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.

With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.

References

1

Retrieved 27 Oct 2023 https://ir.aboutamazon.com/news-release/news-release-details/2023/Amazon.com-Announces-Third-Quarter-Results/default.aspx

2

Retrieved 27 Oct 2023 https://press.aboutamazon.com/2023/7/first-day-of-prime-day-was-the-single-largest-sales-day-ever-on-amazon-helping-make-this-the-biggest-prime-day-event-ever

3

Retrieved 27 Oct 2023 https://ir.aboutamazon.com/quarterly-results/default.aspx

4

Retrieved 27 Oct 2023 https://www.srgresearch.com/articles/ai-helps-to-stabilize-quarterly-cloud-market-growth-rate-microsoft-market-share-nudges-up-again

5

Retrieved 27 Oct 2023 https://www.aboutamazon.com/news/entertainment/prime-video-update-announces-limited-ads

6

Retrieved 15 Jun 2024 https://www.ftc.gov/news-events/news/press-releases/2023/09/ftc-sues-amazon-illegally-maintaining-monopoly-power

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