Amazon (AMZN -3.29%) shares have been on the rise in 2023, up 63% so far this year. However, they have really gotten a boost more recently. Since the company reported its Q3 results, the stock climbed 14%.
The e-commerce and cloud computing juggernaut beat Wall Street estimates, posting revenue of $143.1 billion and diluted earnings per share of $0.94 for the three-month period that ended Sept. 30. This is definitely something shareholders want to see, especially in the uncertain economic environment.
There's one aspect of the business that is showing strength, while another key segment may be starting to worry investors. To gain a complete understanding of both the bull and the bear arguments, let's consider one green and one red flag with this FAANG stock.
Green flag: Strength of e-commerce operations
Elevated levels of inflation and higher interest rates are certainly factors that can concern investors in consumer-facing businesses. They can discourage people from spending as much as they normally would during more robust economic times.
That's why a green flag for Amazon has been the ongoing strength of its e-commerce operations, which include its online stores and third-party seller services. Revenue of $91.6 billion was up 11.4% year over year in Q3.
This performance was certainly boosted by Amazon's annual Prime Day event. "During the quarter, we held our biggest Prime Day event ever, with Prime members purchasing more than 375 million items worldwide," CFO Brian Olsavsky said on the Q3 2023 earnings call.
With the current quarter including the critical holiday shopping period, investors have a lot to be optimistic about. For starters, Amazon has a commanding lead when it comes to online shopping in the U.S. This places it at the top of consumers' minds when they're looking for a place to spend money on gifts for loved ones.
Plus, it's hard to beat Amazon's speedy delivery, which will only bolster the consumer experience. "For the year-to-date period through the third quarter, we have delivered at the fastest speeds ever in the United States," Olsavsky said. "These improvements in delivery speeds have been a key driver of growth and are resulting in increased purchase frequency by our Prime members."
Looking ahead, it's easy to get excited about Amazon's e-commerce prospects. With physical shopping still accounting for 85% of retail sales in the U.S., there is lots of room for this business to expand.
Red flag: Amazon Web Services
Most Amazon shareholders are probably focused on Amazon Web Services (AWS) more than any other segment. But AWS missed consensus estimates in the latest quarter with revenue of $23.1 billion. Not only that, but its year-over-year growth rate of just 12% significantly underperformed its two most formidable rivals in the space, Microsoft Azure and Alphabet's Google Cloud, both of which saw sales jump more than 20%.
Prior to this quarter's fresh data, AWS controlled 32% of the global market for cloud infrastructure services. However, based on the latest figures, it could well be ceding share to its competitors. That's obviously not a good sign.
On the earnings call, CEO Andy Jassy mentioned clients are still focused on cost optimization. But he did note that the number of deals AWS is signing has picked up recently. Maybe the fourth quarter's revenue growth will be more impressive.
A notable bright spot was that AWS posted an operating margin of 30.3% in Q3. That's higher than any of the previous five quarters. For comparison's sake, Google Cloud's operating margin was just 3.2% in the most recent quarter.
Nonetheless, investors will want to see a return to the greater than 20% growth that AWS was generating last year, especially as cloud rivals continue expanding at a faster pace. If not, then it's possible Amazon will fall behind in the artificial intelligence (AI) race as well. That's because AWS is where a lot of the company's AI initiatives will happen.
