Amazon's (AMZN +2.05%) AWS (Amazon Web Services) segment was a top reason to be invested in the stock throughout the 2010s -- the decade cloud computing went mainstream and billions of dollars of annual spending funneled to the next-gen software infrastructure. The pioneer of "renting" out excess data center computing capacity put up incredible growth and has been the main generator of Amazon's operating profit.
But let's not forget about the e-commerce segment, which is now turning an important corner in its own right. As Amazon's original e-commerce business finally starts turning a meaningful profit, it could add to the reasons why this tech giant's stock is a buy right now.
NASDAQ: AMZN
Key Data Points
Amazon gets back to its roots as AWS finds a bottom
Much of the story surrounding Amazon this past summer centered on AWS's slowing revenue growth and declining operating margins. Competition (perhaps from the likes of Oracle Cloud), as well as some customers pulling back on spending to optimize their own cash flow, was to blame for this "bad year."
Though the so-called sluggish growth (12% year-over-year expansion for a business running at a $92 billion annualized sales run rate is no joke) is persisting for now, AWS's operating margin shot up to just over 30% in Q3 2023. This remains a seriously good reason to stay invested in Amazon stock.
|
Period |
AWS Revenue |
AWS YoY Revenue Growth |
Operating Profit Margin |
|---|---|---|---|
|
Full-year 2022 |
$80.1 billion |
29% |
28% |
|
Q1 2023 |
$21.4 billion |
16% |
24% |
|
Q2 2023 |
$22.1 billion |
12% |
24% |
|
Q3 2023 |
$23.1 billion |
12% |
30% |
Data source: Amazon. Chart by author.
But let's talk about the e-commerce business because a similar trend of rising operating margins might just be starting. After spending over a year in the red, the company's North America and international business segments that house the e-commerce platform aren't just back in growth mode. They're also profitable again too, or at least well on the way to becoming profitable again in the case of the international segment.
|
Period |
North America Revenue |
Operating Profit (Loss) |
International Revenue |
Operating Profit (Loss) |
|---|---|---|---|---|
|
2019 |
$171 billion |
4.1% |
$74.7 billion |
(2.3%) |
|
2020 |
$236 billion |
3.7% |
$104 billion |
0.6% |
|
2021 |
$280 billion |
2.6% |
$128 billion |
(7.2%) |
|
2022 |
$316 billion |
(0.9%) |
$118 billion |
(6.6%) |
|
First nine months 2023 |
$247 billion |
3.4% |
$91 billion |
(2.5%) |
Data source: Amazon. Chart by author.
After rightsizing its warehouse, order fulfillment, and logistics networks for a post-pandemic world (read "not just digital world"), Amazon e-commerce is on track to turn a healthy profit margin again. This is fantastic news for shareholders who may have worried about the stock's "expensive" price tag as of late.
No hard line between AWS and e-commerce anymore -- and that's OK
What exactly is housed in this e-commerce empire? Besides selling stuff online, Amazon has been turning itself into a platform for other businesses to build on like never before. It allows third-party merchants to use its marketplace, providing them with an outlet to advertise, land a sale, and utilize Amazon's warehouses and delivery services if they like. Its massive online store is enhanced with the Amazon Prime subscription, which comes with extra perks for members like streaming entertainment and healthcare services (Amazon Clinic and Pharmacy).
It's all stitched together by AWS, of course, the infrastructure that makes Amazon's web empire possible in the first place. It's hard to separate AWS from e-commerce completely, given the blurry lines between where one ends and the other starts.
That being said, perhaps e-commerce was an underrated business the last couple of years. In Q3 2023, various reporting segments notched impressive growth, despite Amazon pulling back on spending to focus on earnings. Third-party seller services revenue grew 20% year over year to $34 billion, advertising was up 26% to $12 billion, and subscriptions increased 14% to $10 billion.
After the latest earnings update, Amazon stock now trades for about 25 times Wall Street analysts' expectations for 2024 free cash flow -- perhaps with upside to those free cash flow estimates if e-commerce continues posting knockout progress like it just did. In a world that continues to be plagued with extreme uncertainty, Amazon still looks like a relative safe haven for investors.
