Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

Amazon Management Talks AWS and Advertising

By Daniel Sparks - Nov 30, 2019 at 4:42PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Don't miss these must-see quotes from the e-commerce giant's CFO. ( AMZN 1.43% ) disappointed Wall Street when it reported its third-quarter results in late October. Both its bottom line for its third quarter and its guidance for fourth-quarter revenue missed analysts' average forecast.

But even though the quarter may have disappointed, Amazon is still a Wall Street darling, with a price-to-earnings multiple of 80. Furthermore, Amazon's underlying business easily lives up to this valuation. Here's a look at some areas of Amazon's business, highlighted by management during the company's most recent earnings call, that investors should be excited about.

A server room with a cloud in it.

Image source: Getty Images.

AWS' prospects remain compelling

Amazon's cloud computing business, Amazon Web Services (AWS), is a critical part of Amazon's business. To put its importance in perspective, Amazon's trailing-nine-month AWS operating income was $6.6 billion, compared to consolidated operating income of $8.3 billion for that period.

But some investors may have been concerned by the company's significant year-over-year contraction in AWS' third-quarter operating margin, which was 25.1%, down from 31% in the third quarter of 2018. 

Management, however, noted that the year-ago operating margin for AWS was achieved on the heels of heavy investments in the business in 2017 -- and now management is similarly ramping up investment in the segment yet again, hoping it will pay off in future quarters.

Amazon CFO Brian Olsavsky explained:

We continue to feel really good about not only the top line, but also the bottom line in that business, but we are investing a lot more this year in sales force and marketing personnel, mainly to handle a wider group of customers, a increasingly wide group of products. We continue to add thousands of new products and features a year, and we continue to expand geographically.

AWS' operating margin in Q3 was primarily negatively impacted by higher sales and marketing costs. Having a smaller negative impact on the segment's profitability during the period were investments in infrastructure. While management indicated it plans to continue investing aggressively in Q4, expense growth for AWS will likely slow in future quarters; and the company's' investments today in the segment will likely support more strong top-line growth for AWS in the year ahead. This lull in operating margin for AWS, therefore, may only be temporary.

Amazon's advertising business accelerated

Buried in Amazon's financial statements is an easily overlooked segment called "other." While it only accounts for 5% of Amazon's total revenue, it's a segment worth paying attention to. The segment is primarily made up of advertising revenue, which is seeing accelerating momentum.

"[O]ther revenue, which is principally advertising, grew 45% this quarter, up from 37% last quarter," noted Olsavsky. "And the biggest thing in there is advertising -- and advertising grew at a rate higher than that 45%. So we are very happy with the progress in the advertising business."

Of course, AWS and, to a lesser extent, Amazon's advertising business are the sort of strong catalysts investors should expect from a megacap growth stock trading at 80 times earnings. In 2020, investors should look for these key growth drivers to continue on their impressive trajectories.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned, Inc. Stock Quote, Inc.
$3,557.28 (1.43%) $50.20

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/01/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.