As one of the largest and best-known companies in the world, Amazon (AMZN +2.02%) is never far from investors' minds. However, whenever Amazon reports earnings, the headline numbers about hitting or missing analysts' targets typically dominate the news coverage of the quarter.
It is often the case that there's more interesting information for investors just beneath the surface. A closer look at the results as well as the trends that are developing in some key areas can be informative for current or potential shareholders. Here are five things investors should know about Amazon.
1. The e-commerce business is slowly improving
The biggest story about Amazon over the past few years has been the massive expansion the company has made to its distribution footprint. In order to meet the demand brought on by the pandemic, Amazon doubled the size of its distribution footprint in two years. This had a negative impact on the operating results of the business.
NASDAQ: AMZN
Key Data Points
The North American segment, which accounts for the domestic side of the e-commerce business, began posting an operating loss in the fourth quarter of 2021. However, as the quarters went on, this loss started to improve, and for the first time in over a year, the segment posted positive operating income in the first quarter of 2023.
This result aligns with management's comments about evaluating every part of the business to ensure it has the potential to drive long-term results like operating income. Investors should keep an eye on this moving forward.
2. Operating income is more important than net income
After several years of consistent bottom line profits, Amazon's net income suddenly plummeted in Q1 of 2022 to a loss of $3.8 billion. While this likely looked shocking to investors, it's important to note that the net loss was primarily due to a $7.6 billion non-cash loss from Amazon's investment in electric auto maker Rivian. While net income has improved over the course of the past year, the most recent quarter was impacted by this investment as well.
It's important to note that this was a non-realized loss, meaning unless Amazon had sold its shares in Rivian, it's a loss on paper only and doesn't have anything to do with the actual performance of the business. Management points out that operating income is a much better predictor of how the business is executing, and that should be the focus of investors.
3. Advertising is becoming more significant
Considering the number of people who use Amazon to search for products, listen to music, or watch streaming content, it's probably not surprising that the company has gotten into the advertising business. One of the key methods of advertising is sponsored product and brand offerings.
Anyone who has used Amazon has seen the sponsored ads at the top of the search page, and those helped Amazon's advertising revenue grow 23% in Q1 of 2023. Advertising still only accounts for 7.5% of overall revenue, but that percentage has grown from 5.9% in Q1 of 2021. Management points out that the company is still in the early days of expanding its advertising efforts in other areas of the business like video, live sports, audio, and grocery.
4. AWS is still the leader in cloud computing
One of the headlines from the Q1 2023 earnings was that the year-over-year growth of Amazon Web Services (AWS) revenue continues to slow. This is not unexpected, as every large cloud infrastructure provider has seen similar headwinds as customers are more cautious about spending.
Despite this slowing growth, Amazon still has one major advantage in that it's the leader in this space with a 32% market share. Amazon's closest competitors are Microsoft's Azure and Alphabet's Google Cloud. Considering that the U.S. cloud computing market is expected to grow at a compound annual growth rate of 13% through 2030, AWS only needs to capture its current share of future customers in order to remain ahead of the pack.
5. Amazon shares are still cheap
Amazon currently trades for 2.2 times sales and 21 times operating cash flow. While those numbers alone don't tell the whole story, a look back at historical averages and all-time lows paints a clearer picture.
AMZN PS Ratio data by YCharts.
Amazon is near the cheapest it's been over the past five years. Over that same time frame, it has grown its revenue by over 140%. There are enough bright spots in recent results to present an interesting return potential from today's valuation.
