Amazon’s Q1 earnings highlight robust performance, especially margin expansion and AWS growth, boosting analyst optimism and shareholder value.
- Amazon’s Q1 earnings exceeded market expectations, showcasing robust financial performance and margin expansion.
- AWS demonstrated strong growth potential and margin capture, buoyed by AI momentum and CapEx trends.
- Analysts remain bullish on Amazon, with unanimous ‘buy’ ratings and a promising price target upside of 16%.
- Catch the latest investment trends! Join our FREE Wall Street Trends Substack community for insights and stay tuned for the newest investment insights.
Source: Unsplash
Amazon’s Q1 earnings were stellar, adding further momentum to Amazon stock (AMZN), which has risen over 3% since earnings day.
In the quarter, several positive factors surfaced, including sustained growth across key segments, with the most notable being margin gains. Despite a more modest guidance that disappointed the market, the company exceeded key analyst estimates.
Amazon’s Q1 Quick Overview
As mentioned in our last article on Amazon, market expectations for this quarter were in line with the company’s guidance. Estimates hovered around net sales of $142.5 billion and an EBIT of $11 billion.
In contrast, Amazon delivered revenue of $143.3 billion, slightly surpassing estimates by approximately 0.5%. Meanwhile, EBIT amounted to $15.3 billion, about 39% higher than market expectations, primarily due to significant margin expansion.
Amazon’s operating income margin rose from 3.7% in 1Q23 to 10.7% in 1Q24, with gains across all lines, as shown in the table below.
Among the positive results, noteworthy is AWS, which not only experienced solid growth driven by AI momentum and margin capture through improved fixed cost management and changes in the estimated useful life of servers, but also presented promising medium-term growth prospects, fueled by the strong GenAI and CapEx trends.
However, the management team once again reinforced that AWS margins should fluctuate, impacted by ongoing investments and the lumpy nature of the business (e.g., different contracts of varying sizes will carry different pricing terms).
Additionally, while less significant to most investment theses relative to overall operating income, the international segment showed margin improvement. This is an excellent indicator that the business could achieve an interesting level of profitability as investments mature and operational leverage is achieved, contributing to the company’s expansion and diversification.
Finally, guidance for Q2 ranged between $144 billion and $149 billion for net sales, about 2% lower than market expectations. Meanwhile, operating income of $10 billion to $14 billion was also approximately 4% lower than market estimates. Although this level appears significantly higher compared to Q2, it’s worth noting it’s slightly lower than Q1’s performance ($15.3 billion).
Amazon Stock: Still Promising
From my standpoint, this quarter for Amazon reinforces its path toward increasing shareholder value, signaling a range of bullish possibilities: from maintaining growth in important businesses (such as cloud) to efficiency gains.
Over the last 12 months, the company achieved an operating cash flow of $99 billion, roughly 19x its EV. Meanwhile, its Free Cash Flow reached $50 billion, or approximately 36.6x its market cap.
While from a Free Cash Flow perspective Amazon stock might appear expensive (with rich multiples), we should remember that Amazon still maintains a high level of CapEx to support growth and future profitability gains. All combined (CapEx declining as maturity increases) along with improved margins and an interesting growth pace, I believe investors will see a significant increase in value going forward.
Q1 earnings also bolstered Wall Street analysts’ optimism, with 42 ‘buys’ out of 42 available ratings on TipRanks. With an average price target of $213, resulting in a 16% upside. Several analysts reaffirmed their ratings on 05/01, such as Shmulik from Bernstein, justifying the rating with the combination of “impressive financials” alongside growth prospects.
The Verdict
Considering the above, Amazon’s Q1 was not only robust in financial terms but also served to maintain high expectations for the company’s future, demonstrating its ability to continue expanding margins alongside a healthy growth pace, despite slightly weaker Q2 guidance.
Amazon remains one of the major companies with huge moats and unique business characteristics, with a strong outlook for shareholder value generation, in my view.
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content)
Leave a Reply