E-commerce and cloud computing pioneer Amazon (AMZN 3.43%) published a wonderful second-quarter 2023 financial update. The North American retail business flipped to an operating profit versus a year ago, and international operating losses narrowed. However, AWS (Amazon Web Services) -- the longtime cloud computing cash cow of the overall Amazon machine -- reported a big drop in profit margins.
CEO Andy Jassy has been signaling that there would be a near-term weakness for the cloud, but there's also disruption going on from a slew of competitors. Jassy thinks the AWS slump is temporary, though, and it may be more of a bruise than a deep wound. Here's why I'm buying more Amazon stock right now.
The present situation is manageable
After years of rapid growth and high operating profit margins, AWS has been reporting a margin haircut in 2023.
|
Period |
AWS Operating Income |
AWS Operating Margin |
|---|---|---|
|
2019 |
$9.2 billion |
26% |
|
2020 |
$13.5 billion |
30% |
|
2021 |
$18.5 billion |
30% |
|
2022 |
$22.8 billion |
29% |
|
First half 2023 |
$10.5 billion |
24% |
Data source: Amazon.
The good news is that AWS is still raking in the chips, and accounts for nearly all of the Amazon empire's operating income. (North American retail brought in just $4.1 billion in operating income in the first half of 2023, a meager operating margin of just 2.6%; international retail lost $2.1 billion over that same period.)
Jassy explained on the Q2 earnings call that the primary reason for AWS' sluggish results (12% revenue growth) is that many customers have been looking for ways to cut expenses as they are in cash conservation mode. But there's more to the story. AWS pioneered the use of the cloud, but it's facing substantial competition from tech giants and smaller upstarts (spurred on by the recent generative AI training boom) alike.
|
Company |
Quarterly Revenue YoY % Growth |
Q2 2023 Annualized Revenue Run-Rate |
|---|---|---|
|
Amazon AWS |
12% |
$88.4 billion |
|
Microsoft (MSFT 1.82%) Azure |
26% |
>$55 billion |
|
28% |
$32.1 billion |
|
|
Oracle (ORCL 2.02%) Cloud (excluding growth from Cerner acquisition) |
33% |
$17.6 billion |
|
DigitalOcean (DOCN 3.30%) |
27% |
$680 million |
Data source: Amazon, Microsoft, Alphabet, Oracle, and DigitalOcean.
Again, the good news here is that Amazon is still growing, as cloud computing addresses just a small portion of the multi-trillion-dollar global IT market. There's plenty of room for everyone to expand with some elbow room to spare. Jassy and company remain confident in AWS' long-term trajectory.
Why Amazon is a buy
AWS is going to be fine as it goes through some growing pains, and the e-commerce juggernaut is only just beginning to pull on new profit levers like digital ads and services for third-party online sellers. In fact, this e-commerce segment has a long way to go toward being robustly profitable like AWS is today, providing ample room for Amazon to boost cash profits in the decade ahead.
If you're keeping score, Amazon's North American operating segment (excluding AWS) generated just a 2.6% operating margin in Q2 2023, and the International segment was still losing a bit of money.
Even now, though, Amazon's work to change its distribution centers, shipping, and other software-driven e-commerce services is beginning to pay off -- and create a nice profitable side-car to the main AWS vehicle. Wall Street analysts expect a consensus $33 billion in total Amazon free cash flow in 2023, with double-digit percentage growth sustaining into 2024 and beyond.
Based on this, Amazon stock trades for about 42 times expected 2023 free cash flow. If you believe AWS can fend off competition, and other Amazon e-commerce segments can start pulling their weight, the stock could be a fantastic long-term value right now. I'm an Amazon buyer today.
