Amazon's Strong Q3 Performance Amid Macroeconomic Challenges

2. Nov. 2023

Amazon's Strong Q3 Performance Amid Macroeconomic Challenges

Amazon made headlines last week with a 7% surge in its stock following the release of its third-quarter report. The e-commerce giant's revenue showed remarkable growth, soaring by 13% year over year to reach a staggering $143.1 billion. Notably, Amazon's net income more than tripled, hitting $9.9 billion, equivalent to $0.94 per share, exceeding analyst expectations.

While Amazon continues its growth trajectory, questions arise about its suitability as an investment, given the ongoing macroeconomic challenges affecting the e-commerce and cloud sectors. To make an informed decision, let's dive deeper into Amazon's growth rates and valuations.

In Q3, Amazon generated 61% of its revenue from its North American division, 22% from its international unit, and 16% from Amazon Web Services (AWS), the world's leading cloud infrastructure platform. All three segments faced challenges over the past year due to inflation affecting consumer spending on e-commerce platforms and macroeconomic headwinds constraining spending on cloud-based services.

However, Amazon's last three quarters have seen stabilization in both its North American and AWS segments, with the international unit gaining momentum. Consequently, the company's total revenue growth has accelerated over two consecutive quarters.

During the Q3 conference call, Amazon CFO Brian Olsavsky attributed the stability in North American sales to several factors, including the "biggest Prime Day event ever," logistics upgrades, increased participation of third-party sellers, and the expansion of its integrated advertising business. These improvements offset the impact of cautious consumer spending on discretionary items.

Amazon's international business also saw an upturn as macroeconomic conditions improved, and currency headwinds subsided. CEO Andy Jassy noted that the company's emerging international stores continued to grow on a "strong trajectory."

In the case of AWS, the cloud platform's growth stabilized as it attracted more clients and introduced new generative AI features. Although many companies were still optimizing their cloud spending, this process began to slow down as they shifted their focus toward innovation and bringing new workloads to the cloud.

Notably, AWS's growth is slower than its closest competitor, Microsoft's Azure, which reported a 29% year-over-year revenue increase in its latest quarter.

As Amazon's sales growth stabilized in Q3, its operating margin increased significantly, driven by various factors. This suggests Amazon is actively working to boost the margins of its lower-margin non-cloud businesses, rather than relying solely on higher-margin AWS to offset losses in other areas.

For the fourth quarter, Amazon anticipates its operating margin to expand by 370 basis points year over year. Analysts predict a 5% increase in Amazon's revenue for 2023 and a 12% rise in 2024, with expected earnings growth of 44% in 2024.

With Amazon's stock currently carrying a forward earnings multiple of 39, it appears reasonably valued. While it may not revisit its all-time highs in the near term, the company still holds significant upside potential in the current challenging market environment. Amazon continues to navigate the complexities of the global economy, making it an intriguing investment prospect.

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