As far as quarterly results go, Amazon (AMZN 0.58%) shareholders have nothing to complain about right now. The e-commerce giant's first-quarter revenue of $143.3 billion and per-share earnings of $0.98 both topped estimates and were well up from year-ago levels. Amazon stock edged higher following Tuesday evening's release of the company's first-quarter report. Chalk up another win for all the obvious reasons.
However, there are some less obvious reasons to buy Amazon stock that further bolster the already bullish case here.
1. Amazon Web Services is becoming much more cost-efficient
Perhaps one of Amazon's most exciting growth engines at this time is its cloud computing arm. Indeed, Amazon Web Services (or AWS) has grown at a double-digit pace for several years now. This business ran into an alarming wall beginning in mid-2022, though, thanks to the steep costs of operating a cloud computing arm in an environment rife with inflation. AWS's operating income and operating margin rates have been weak since 2022, even though its cloud revenue has continued to grow.
This all seems to have dramatically changed last quarter, however. Following the slight turnaround that started taking shape in the third quarter of last year, AWS's operating margin jumped to a record-breaking 37.6% during the first quarter of this year.
Data source: Amazon Inc. Chart by author. All dollar figures are in billions.
Deliberate cost-containment certainly helped. There's also the benefit of inflation that's at least starting to level off. Then there's the benefit of scale. That is to say, the bigger this business gets, the more cost-efficiently it can be managed.
Whatever the reason(s), given that Amazon Web Services accounts for nearly two-thirds of Amazon's operating income, these widening profit margins are a pretty big -- and encouraging -- deal.
2. E-commerce is (finally) a business well worth running
It's curious. In Amazon's infancy, it was far more concerned with expanding its reach than turning a profit. And investors were OK with the idea. The company never seemed interested in turning up the heat on its bottom-line growth, though -- not even when it arguably could have. Shareholders became so accustomed to its thin profit margins that they never really pressed the issue either.
Well, lo and behold (and without a great deal of fanfare), Amazon's e-commerce operations are finally turning a surprisingly wide profit. After record-breaking fourth-quarter operating income, its Q1 e-commerce operating income of $5.9 billion is another record-breaker for the calendar quarter in question. That's impressive, given how inflation has been a problem for corporations and consumers alike.
Data source: Amazon Inc. Chart by author. All figures are in billions.
Perhaps the most compelling data offered up in the chart above, however, is that Amazon's international e-commerce business is turning profitable again, even though this arm has seen minimal revenue growth since the pandemic-prompted surge. This will help justify the company's continued investment in its overseas operations, where the bulk of its future growth will lie; the North American market is pretty well saturated.
3. Advertising and subscription revenue is soaring
But why is Amazon's e-commerce business suddenly so profitable? Greater scale and improved efficiency are certainly factors. However, the business is also evolving. Amazon.com is becoming less of a mere online mall and more of an advertising platform.
Oh, it's almost always been one, for the record. That is to say, third-party sellers have long been able to pay to have their products more prominently featured on the website. Over the course of just the past few years, though, it's turned up the heat in this business. Last quarter's advertising revenue of $11.8 billion is 24% better than the year-earlier comparison, extending a well-established growth trend. This is high-margin revenue, too.
Data source: Amazon Inc. Chart by author. All figures are in billions of dollars.
The other data set displayed on the chart above maps the growth of Amazon's subscription businesses. This is predominantly revenue generated by subscriptions to Amazon Prime but can also include other subscription-based services, like digital music or grocery delivery. Last quarter's subscription revenue reached a record-breaking $10.7 billion, up 11% year over year.
This continued growth is no small matter, but not necessarily for the reason you might think. It's not so much about that revenue. These subscribers are known to spend more with Amazon than non-subscribers do. This rising figure simply says the company is adding more fruitful customers to its active-customer headcount.
All of it makes Amazon stock an even better buy
These aren't the only reasons to own Amazon stock, of course. The bigger, more obvious ones are still in place. These include the company's dominance of the e-commerce market and its ongoing expansion. Amazon Web Services is also a compelling business, regardless of whether its profit margins are improving.
Nevertheless, these details do make the already solid bullish arguments even better. Amazon is handling the big things and the little things well, capitalizing on its unique strengths, like its sheer size and technological capabilities. Few other companies are ever going to be able to match either.
