In the opening remarks of his 2023 annual letter, Amazon (AMZN -0.37%) CEO Andy Jassy outlined the company's massive ramp-up of operating profit and free cash flow (FCF): operating income went from $12.2 billion in 2022 to $36.9 billion in 2023, and FCF -- backing out equipment financing -- soared from negative $12.8 billion to positive $35.5 billion in 2023.
Savvy investors were always looking for this type of rebound in the last year, and the e-commerce and cloud computing giant certainly delivered. But as great as 2023 was, this new Amazon story may be just beginning. Here's why there's plenty to like about the stock right now after the Q1 2024 update.
NASDAQ: AMZN
Key Data Points
The big payoff from disciplined expense management
To kick off the new year, Amazon reported continual sluggish growth -- at least, "sluggish" in terms of what Amazon has delivered for the last couple of decades. Revenue was up 13% from a year ago to $143 billion.
However, the operating leverage story that unfolded in 2023 is far from over. Operating income was $15.3 billion, up dramatically from $4.8 billion a year ago. And as for FCF, a few months ago, I had stated how my base case was for $50 billion to be generated for full-year 2024. That was far too conservative. On a trailing 12-month basis ending in March 2024, Amazon already cleared that milepost, delivering $50.1 billion.
More slow-growth but higher-profit performance is coming in Q2. Jassy and company expect revenue to be up just 7% to 11% year-over-year, but operating income to be up as much as 82% to an upper range of $14 billion.
What happens when growth picks up pace again?
Amazon reports its sprawling empire in three basic segments: North America and International (both of which encompass the e-commerce business), and the cloud computing infrastructure business AWS (Amazon Web Services). All three of these units reported strong performance to start 2024.
|
Amazon Segment |
Q1 2024 Revenue |
Operating Margin |
Q1 2023 Operating Margin (Loss) |
|---|---|---|---|
|
North America |
$86.3 billion |
5.8% |
1.2% |
|
International |
$31.9 billion |
2.8% |
(4.3%) |
|
AWS |
$25.0 billion |
37.6% |
24% |
Data source: Amazon.
Of particular note, though, was the AWS business -- which to this day still accounts for the vast majority of Amazon's overall profit. Besides the big rally in profit margin, AWS notched a meaningful uptick in sales growth last quarter as well. Sales were up 16.8% from Q1 2023, accelerating from the 13% pace of growth for full-year 2023 and the 13.1% rate of growth in Q4 at the end of last year.
For the record, tech researcher Gartner (NYSE:IT) believes the cloud industry will heat back up again in 2024. It expects cloud end-user spending to be up more than 20% from 2023 to nearly $680 billion worldwide, up from the 18% rate of expansion in 2023.
If AWS follows this general trend, it could mean great things for Amazon the rest of 2024 as higher growth and higher margins mean the bottom line could continue to soar higher. Indeed, the $50 billion in expected full-year FCF was an easy bar to clear. The consensus among Wall Street analysts is now $60 billion in FCF from Amazon, with early estimates pointing to well over $70 billion in 2025.
There's risk in counting too many eggs before they hatch. However, if Amazon can continue with its new operating model of driving far higher profit margins in this era of slower sales growth, there's a lot of life left in this stock. Shares trade for 32 times the consensus expectation for 2024 free cash flow, which could make this one of the best "Magnificent Seven" stocks to buy right now.
