Amazon: Rapidly investing in the cloud, is the profit release period about to disappear again?

On the evening of February 7th, after the US stock market closed, $Amazon(AMZN.US) announced its Q4 2024 financial report, which had both highlights and flaws. The profits were impressive, but the growth was slightly disappointing. The relatively conservative guidance and rapidly increasing Capex are also issues. Specifically:

1. The most closely watched segment, AWS's revenue growth rate this quarter was 18.9% year-on-year, slowing down by about 0.2 percentage points compared to the previous quarter, and also 0.1 percentage points lower than the sell-side expectations. According to Dolphin Investment Research, buyers still expect growth of 20% or higher. Therefore, AWS's growth is clearly unsatisfactory.

However, the other two major cloud services that previously announced their results, Azure and GCP, both saw significant deceleration in growth this quarter, underperforming market expectations, reflecting that the overall demand in the cloud service market, including traditional businesses, is not as strong as anticipated. Of course, looking solely at AI-related demand, the statements from various companies during their earnings calls generally indicate strong demand, but are constrained by insufficient supply capacity. Therefore, AWS's underperformance this time is not surprising. It can even be said that the gap between AWS and the other two cloud service providers has narrowed in an environment where "everyone is underperforming."

Additionally, AWS's operating profit margin this quarter was 36.9%, a significant decline from the historical high of 38.1% in the previous quarter. We believe part of the reason is that the benefits from extended depreciation periods have basically passed, along with the impact of increased AI investments. However, the market had already anticipated the decline in profit margins, and the actual performance exceeded the expected profit margin of 35.1%. The actual operating profit was approximately $10.6 billion, higher than the expected $10.1 billion. But with the continued rapid increase in Capex investment, it remains to be seen whether AWS's profit margin will continue to decline.

2. The revenue growth rate for the general retail sector this quarter was 9.1%, slightly down by 0.4 percentage points from the previous quarter, in line with market expectations.**In terms of regional performance,**the growth rate of North American retail actually accelerated from 8.7% to 9.5%, consistent with high-frequency survey data showing strong holiday consumption in the US.**However,the nominal growth rate of international retail business dropped significantly from 11.7% to 7.9% this quarter,and under constant exchange rates, the growth rate in international regions still declined by 3 percentage points quarter-on-quarter.It is evident thatthe drag from international regions (possibly mainly from Europe) and the negative impact of exchange rates are the main reasons for the slight weakening in growth in the retail sector.

Structurally, the revenue from 3P merchant services decreased by 1.3 percentage points quarter-on-quarter, underperforming expectations by 1.1%; the growth rate of subscription service revenue slowed by 1.2 percentage points; and the market's focus onincremental revenue sources—advertising business revenue growth also slightly declined by 0.8 percentage points, underperforming market expectations by 0.3 percentage points **

It can be seen that apart from the self-operated retail business, other segmented businesses generally show a slowdown in growth and underperform against market expectations. Therefore, despite the overall total revenue of approximately $187.8 billion slightly exceeding market expectations by 0.3%, which seems good, the 3P services and advertising, which are high-profit businesses, performed poorly, indicating a relatively weak structure.

3. This quarter, Amazon's profits still significantly exceeded expectations, with overall operating profit reaching $21.2 billion, far exceeding the sell-side expectation of $18.9 billion and the previous guidance upper limit of $20 billion. According to our understanding, the buy-side expected performance was only above $20 billion, and the actual performance was even better. The overall operating profit margin is 11%, which has increased by 0.3 percentage points quarter-on-quarter.

The strong growth in North American retail business is the biggest contributor, achieving an operating profit of nearly $9.3 billion, which is about $2 billion higher than market expectations (equivalent to 27%). The operating profit margin reached 8%, up 1.9 percentage points year-on-year, far exceeding the expected 6.4%.

In contrast, the international retail business saw a decline in operating profit margin of 0.6 percentage points to 3% compared to the previous quarter, but still exceeded the expected 2.8%, not dragging down the overall performance of the group. The impact of exchange rate factors is likely one of the main reasons for the quarter-on-quarter decline in profit margin.

4. From the perspective of costs and expenses, the gross profit margin for this quarter was 47.3%, lower than the expected 48.2%. The negative impact of exchange rates, increased depreciation due to growth in Capex investment, and relatively weaker growth in high-profit advertising and 3P businesses are all factors contributing to the decline in gross profit margin. However, cost control and efficiency improvements are still ongoing. In terms of the proportion of revenue, the expense ratios have decreased year-on-year, with an overall year-on-year reduction of 1.7 percentage points. The improvement in operational efficiency completely offset the impact of the quarter-on-quarter decline in gross profit margin, thus overall profits remain strong.

However, in this quarter, Amazon's Capex significantly increased by about $5 billion quarter-on-quarter to $27.6 billion ( this is based on the company's cash flow statement disclosure, which has some discrepancies with the figures mentioned in the conference call, but is generally similar ), with a year-on-year growth rate continuing to rise to 95%. Both the absolute value of investment and the growth rate have reached new highs. According to the disclosures in the conference call, total Capex spending is expected to exceed $100 billion in 2025.

6. For the next quarter's performance guidance, the company expects a revenue range of $151 billion to $155.5 billion, with the midpoint significantly lower than the market expectation of $158.8 billion. On the profit side, the company guides operating profit to be between $14 billion and $18 billion, also lower than the market expectation of $18.2 billion. The upper limits of both revenue and profit guidance are below market expectations, which will clearly be interpreted by the market as a weak outlook. However, based on the company's actual delivered performance, it generally aligns closely with the upper limit of guidance, so the degree of expected misses is not very large

Dolphin Investment Research Perspective:

According to our understanding, Amazon is currently one of the most consistently bullish and widely held stocks in the market. The bullish points for Amazon include: 1) Benefiting from AI, AWS's growth may accelerate; 2) The retail segment has room for continued margin improvement mainly due to enhanced fulfillment and operational efficiency; 3) With the launch of Prime Video, the company still has considerable growth potential in e-commerce advertising and more general brand promotion advertising.

However, this time, the performance in point 1 fell short, as AWS did not accelerate and instead showed marginal deceleration. This is not surprising given the similarly weak performance of Azure and GCP.

Regarding point 2, the continued rapid acceleration of retail margins in North America and the ongoing decline in fulfillment costs indicate that the trend of improving operational efficiency in the retail business, leading to margin growth, is still ongoing.

For point 3, the slight miss in advertising revenue growth has left some disappointment in this highly anticipated growth area.

Therefore, among the three points above, two are relatively negative and one is positive.

Additionally, the guidance for the next quarter appears weak, especially as the upper limit of profit guidance is below market expectations. This situation also occurred in the 2Q24 performance, which led to a stock price drop of about 9%. The concern at that time was that the trend of improving retail margins might be coming to an end, or at least pausing. According to our calculations, based on this profit guidance upper limit, the implied retail business margin may slightly decline quarter-over-quarter (of course, there are significant foreign exchange factors dragging it down, along with seasonal impacts), further suggesting that the trend of improving retail margins may at least (temporarily) come to an end.

Moreover, the rapidly increasing Capex will continue to exert pressure on the short- to medium-term profit outlook, which is not favorable for short- to medium-term investors. Therefore, for Amazon, which is generally viewed positively and has high expectations, the impact of this performance in the short term is clearly relatively negative.

Detailed Commentary as Follows:

1. Growth Did Not Accelerate, Margin Decline, What Will Happen to AWS?

As AI is currently an undisputed market investment theme, the market places particular emphasis on AWS's performance among the company's various businesses. This quarter, AWS's revenue growth rate year-over-year was 18.9%, slowing by about 0.2 percentage points compared to the previous quarter and also 0.1 percentage points lower than sell-side expectations. However, according to Dolphin Investment Research, buy-side expectations remain for growth of 20% or higher. Therefore, AWS's growth is clearly disappointing.

However, the other two major cloud services that previously announced results, Azure and GCP, also saw significant deceleration in growth this quarter, underperforming market expectations, reflecting that the overall demand in the cloud services market is not as strong as anticipated. Thus, AWS's underperformance this time is not particularly surprising. Although it did not show the expected acceleration in growth, AWS's growth rate remaining relatively stable has still narrowed the gap with the other two

In terms of profit, AWS's operating profit margin for this quarter was 36.9%, a significant decline from the historical high of 38.1% in the previous quarter. We believe part of the reason is that the bonus period for the depreciation period extending by one year in the first quarter of this year has basically passed, along with the impact of increased AI investments. The market had anticipated the decline in profit margins, and the actual performance exceeded the expected profit margin of 35.1%. The actual operating profit was approximately $10.6 billion, higher than the expected $10.1 billion. However, with the recent rapid increase in Capex investments, AWS's profit margin may fluctuate, making it worth paying attention to the management's outlook.

2. Overall seems okay, but structural quality is poor, with significant overseas drag

The revenue growth rate of the general retail sector this quarter was 9.1%, slightly down 0.4 percentage points from the previous quarter, which is completely in line with market expectations. In terms of regional performance, the growth rate of North American retail actually accelerated from 8.7% to 9.5%, which is consistent with high-frequency survey data indicating that holiday consumption in the U.S. is relatively strong. However, the nominal growth rate of international retail business dropped significantly from 11.7% to 7.9% this quarter, and even at constant exchange rates, the growth rate in international regions still declined by 3 percentage points quarter-on-quarter. It is evident that the drag from international regions (possibly mainly from Europe) and the negative impact of exchange rates are the main reasons for the slight weakening of the retail sector.

Looking at each segment: ① The self-operated retail business grew by 7.1% year-on-year with almost no decline quarter-on-quarter, making it the only major segment that outperformed market expectations;

② Revenue from 3P merchant services declined by 1.3 percentage points quarter-on-quarter, underperforming the expected 1.1%;

③ Similarly, the growth rate of subscription service revenue decreased by 1.2 percentage points; the market concerns about incremental revenue sources--the growth rate of advertising revenue also slightly decreased by 0.8 percentage points, underperforming the market expectation of 0.3 percentage points. It can be seen that apart from the self-operated retail business, other segmented businesses generally show a slowdown in growth and underperform market expectations. However, the profit margin of the well-performing self-operated retail business is quite low, while high-margin businesses such as 3P services and advertising perform poorly. Therefore, although the overall total revenue of approximately $187.8 billion is slightly higher than market expectations by 0.3%, it seems good, but structurally it is relatively poor.

3. Overall profit continues to exceed expectations, with North America being the biggest contributor

In terms of revenue, due to the lackluster performance of AWS cloud computing, the structure of the general retail business is also not good. However, Amazon's profit this quarter still significantly exceeded expectations, with overall operating profit reaching $21.2 billion, far exceeding the sell-side expectation of $18.9 billion and the previous guidance upper limit of $20 billion. According to our understanding, the buy-side expected performance was only above $20 billion, and the actual performance was even better. The overall operating profit margin is 11%, which has increased by 0.3 percentage points quarter-on-quarter.

By segment, as mentioned earlier, the actual operating profit of the AWS cloud business was about $500 million higher than expected, although the profit margin slightly declined, it was better than expected.

The strong growth of the North American retail business is the biggest contributor to the profit exceeding expectations this quarter, achieving an operating profit of nearly $9.3 billion, which is about $2 billion higher than market expectations (equivalent to 27%). The operating profit margin reached 8%, an increase of 1.9 percentage points year-on-year, far exceeding the expected 6.4%.

The relatively weak international retail business saw its operating profit margin decline by 0.6 percentage points to 3% compared to the previous quarter, but it is still good, higher than the expected 2.8%. Although it is not strong, it did not drag down the overall profit of the group. The impact of exchange rate factors should be one of the main reasons for the quarter-on-quarter decline in profit margin.

4. Efficiency improvement and cost control continue, Capex continues to rise rapidly From the perspective of costs and expenses: 1) The gross profit margin for this quarter is 47.3%, lower than the expected 48.2%. Dolphin Investment Research believes that the negative impact of exchange rates, the increase in Capex leading to higher depreciation, and the relatively weaker growth of high-margin advertising and 3P businesses are all factors contributing to the decline in gross profit margin.

However, from the expense perspective, cost control and efficiency improvement are still ongoing. In terms of the proportion of revenue, various expense ratios have decreased year-on-year, with an overall year-on-year reduction of 1.7 percentage points. Therefore, the improvement in operational efficiency completely offset the impact of the slight decline in gross profit margin on a quarter-on-quarter basis.

It is also important to note that in this quarter, Amazon's Capex significantly increased by about 5 billion to 27.6 billion ( this is based on the company's cash flow statement, which has some discrepancies with the figures mentioned in the conference call, but is generally similar ), with a year-on-year growth rate continuing to rise to 95%. Whether in terms of absolute investment or growth rate, it has reached a new high.

Correspondingly, the company's amortization and depreciation this quarter also increased to 15.6 billion, with a year-on-year growth rate rising to 13% . This indicates that the high investment's drag on profits is beginning to show, but it should not have reached its peak yet, and attention is still needed.

Dolphin Investment Research's past research on [Amazon]:

Financial report commentary

November 1, 2024 financial report commentary 《 Amazon: Profits have exploded again, but the massive Capex has "clouds hanging overhead" 》

November 1, 2024 conference call《 Amazon: Can profit margins continue to rise under massive investment? 》

August 4, 2024 financial report commentary《 [AI accelerates investment, users are more frugal, is Amazon going to "take a break"?](https://longportapp.com/zh-CN/topics/22927973? 2024-08-04 Conference Call: Amazon: Views on Consumer Sentiment and AI Investment Pace

2024-05-01 Conference Call: Amazon: Profit Rocketing, Clash of Strong Performance and High Expectations

2024-05-01 Earnings Report Commentary: Amazon: Profits Will Continue to Rise, but Investment Cycle is Restarting

2024-02-02 Conference Call: Amazon: Retail Continues to Improve Efficiency, Huge Potential in AI Cloud Computing

2024-02-02 Earnings Report Commentary: “Reborn” Amazon, How Many Surprises Are Left

2023-10-27 Conference Call: Amazon: New Cloud Computing Demand Will Strengthen Again

2023-10-27 Earnings Report Commentary: After Google, Meta and Others Stumble, Is Amazon the “Backbone” of US Stocks?

2023-08-05 Conference Call: Amazon: Retail Efficiency Reemphasized, AI Will Be Heavily Invested

2023-08-05 Earnings Report Commentary: Retail Stands Strong, Amazon is Confident Again

2023-04-28 Conference Call: Amazon: Cloud & AI & Efficiency Improvement and Cost Reduction are the Three Major Themes

2023-04-28 Earnings Report Commentary: Amazon: Retail Profits Soar, but Can’t Lift the Weak “AWS”? In-depth Research

On February 28, 2023, "Microsoft and Amazon lie down, is it time for Airbnb & Uber to claim the throne?"

On May 30, 2022, "The macro 'headwind' is too strong, Amazon can't hide even with the cloud"