Amazon (AMZN 3.43%) is the Swiss army knife of the technology sector. It operates in e-commerce, cloud computing, digital advertising, and even robotics. For that reason, the company is a great bellwether for the health of the consumer, the business sector, and the broader economy.
That's why investors were watching its 2023 first-quarter earnings results closely. Here are three things they learned.
1. Amazon delivered more profit than Wall Street expected
Amazon had a difficult 2022. E-commerce is the company's largest revenue source, and the segment shrank by 1% for the year on the back of weak consumer spending, driven by high inflation and rising interest rates. Plus, Amazon owns a stake in electric vehicle manufacturer Rivian Automotive, and it suffered a whopping $12.7 billion loss for the year on its share.
As a result, Amazon ended 2022 with an overall net loss of $2.7 billion, its first year in the red since 2014.
It was important for the company to turn its financial fortunes around in the first quarter of 2023, and it answered the call. Amazon's net income came in at $3.2 billion, or $0.31 per share, far exceeding the $0.20 Wall Street analysts were expecting.
The positive result is attributable to the company's cost-cutting measures. Since last November, Amazon has announced 27,000 job cuts, and it has focused on closing loss-making divisions including Alexa.com and Halo Health. Additionally, each year, it relies more and more on an army of robots to run its fulfillment centers, which helps reduce labor costs. At the end of 2022, it had 520,000 of them in operation.
2. Amazon's cloud revenue is slowing
On a less positive note, Amazon's industry-leading cloud segment continued to slow in Q1. Amazon Web Services (AWS) provides hundreds of services and solutions to help businesses with their digital transformation, whether they need simple website hosting and data storage, or more complex tools like machine learning and artificial intelligence.
AWS is consistently one of the fastest-growing pieces of Amazon's entire organization, but investors have grown concerned by its slowdown in recent quarters. The segment has matured, and that typically comes with slower growth -- eventually, the point of saturation is reached, and it becomes harder to acquire new customers. Plus, the tough economic environment has forced businesses to invest less money in new technology projects in the short term.
As a result, AWS revenue grew just 16% year over year, which was less than half the growth rate it delivered in Q1 2022.
But AWS is also critical from a profitability perspective. In Q1, it delivered $5.1 billion in operating income, while the rest of Amazon combined for an operating loss. The company's e-commerce business runs on razor-thin profit margins so it often makes losses. AWS is therefore tasked with dragging the rest of the company out of the red.
3. Advertising was the fastest-growing part of Amazon
At the end of 2021, Amazon began reporting its advertising business as a stand-alone segment. It revealed more than $30 billion in annual revenue paired with a blistering growth rate, and it continues to perform well.
Amazon.com generates 2.4 billion hits per month, so it's the perfect place for merchants to advertise their products. Plus, the company continues to develop its media portfolio, which now includes Prime Video, Prime Music, and the Twitch streaming service. Within those platforms are a growing number of rights deals, including for live sports headlined by NFL football and European soccer. Prime also rocked the entertainment industry in 2022 when it invested $1 billion in its Lord of the Rings spinoff, Rings of Power.
Attracting more eyeballs will be key to building Amazon's digital advertising business over the long term. The more consumers there are on its ecosystem, the more attractive advertising on Amazon becomes for businesses.
In Q1, the company's advertising segment generated $9.5 billion in revenue, marking a 23% year-over-year increase. That was the fastest growth rate of any of Amazon's stand-alone business units, and it highlights the organization's operational diversity, which I think could be key to it amassing a $5 trillion valuation within a decade.
