Amazon (AMZN 1.16%) investors reacted well to its second-quarter 2023 earnings report. The stock price rose 8% the day after the release and continues to increase.
That positive reaction comes despite the fact that its cloud-computing arm, Amazon Web Services (AWS), saw a significant slowdown in growth. Also, a closer examination of Amazon's e-commerce segments may point to more struggles that investors may not have noticed.
That suggests shareholders may need to start looking at this company from a different perspective.
Amazon's evolving financials
On the surface, it looks like Amazon is well on its way to recovery. The $134 billion in net sales for the quarter increased 13% versus year-ago levels. However, this differs from quarters of the past. The North America and International segments, which account for 83% of Amazon's revenue combined, increased net sales by 11% and 10%, respectively. This is only slightly less than AWS, which experienced a 12% year-over-year increase.
In recent quarters, both the North America and International segments, which earn most of their revenue from online sales, either experienced declines or achieved only negligible growth. In 2022, North America grew net sales by 13% while International fell by 8%. In contrast, AWS had been the growth driver, and its net sales surged 29% higher over the same time frame.
So, what's going on?
This appears to show that tech growth slowed at a time when retail sales began to recover.
On the Q2 2023 earnings call, CEO Andy Jassy said AWS clients were "cost optimizing," meaning they have reevaluated their cloud spending amid more challenging economic conditions. Customers also focused on innovation and bringing new workloads to the cloud, but those actions still resulted in slower growth.
With the North America and International segments, the improvement did not stem primarily from an e-commerce recovery. In Q2, online sales grew by only 4% over the last year. Instead, double-digit sales growth in advertising services, physical stores, and subscription services led to the increase.
Amazon did not publish operating margins for these businesses, though the North America and International segments reported operating margins of 3.9% and negative 3%, respectively, for the quarter. That could indicate that its more prosperous businesses led to positive operating income in North America, implying the online stores continue to serve as a loss leader.
In contrast, AWS reported a quarterly operating margin of 24%, a level comparable to the previous two quarters. It also continues to generate most of the company's profits, though investors should watch AWS' growth rate more closely.
How investors should react
Amazon investors should realize that the stock likely remains a buy amid the challenges. Even if e-commerce is not driving its non-AWS segments, investors should remember that many of Amazon's businesses continue to grow at double-digit percentages.
However, rather than measuring Amazon's prosperity based on its e-commerce segments, investors need to perceive online sales as a support business. It keeps the Amazon name on customers' minds and makes the subscription, third-party seller, and ad businesses possible.
It is unclear whether online sales earn Amazon a profit, and even under better conditions, its profits may not be significant. But the good news is that it may not matter. AWS has shown it can maintain its margins amid a slowdown in revenue growth, and it drives most of the company's profit. With the help of other emerging growth businesses, this internet and direct marketing retail stock should stay on an upward trajectory.
