AI heavy investment, tariff turmoil, Amazon re-enters the 'squatting period'?

After the US market closed on the morning of May 2nd, $Amazon(AMZN.US) released its Q1 2024 earnings report. The quarterly performance was decent, appearing relatively strong against overly conservative expectations. However, the main concern lies in the company's lower-than-expected profit guidance for the next quarter, hinting at a sequential decline in margins. Key takeaways:

1. AWS growth didn’t accelerate, but profits significantly exceeded expectations: AWS revenue grew 16.9% YoY this quarter, slowing by ~2pct QoQ and falling short of sell-side expectations of 17.3%. Unlike Azure’s surprisingly strong performance yesterday, AWS showed no upside surprises.

That said, market expectations for AWS were already low pre-earnings. Among the three cloud giants, both GCP and AWS showed slowing growth trends, while Azure’s acceleration was primarily driven by AI contributions—traditional non-AI growth also decelerated slightly. This suggests weakening enterprise spending on traditional non-AI demand, making AWS’s mediocre performance somewhat expected.

According to some research, AWS faces more pronounced bottlenecks in securing high-performance GPUs and new data center/compute capacity compared to Azure, limiting the release of AI demand (while traditional demand remains weak). This may partly explain AWS’s failure to reaccelerate growth.

2. Despite flat growth, AWS profits crushed expectations: Operating margins hit 39.5%, up 2.6pct QoQ and 4pct above consensus. Given the company’s decision in January to shorten server depreciation from 6 to 5 years and rising depreciation from high Capex, markets had expected margin contraction. Instead, margins expanded—management’s explanation for this surprise (e.g., one-time benefits) will be key.

3. Weakness in both North America and international retail: Total retail revenue of $126.4B grew 6.9% YoY, decelerating 2.2pct QoQ. Adjusting for forex headwinds, performance was slightly better than conservative expectations. Regionally:

- North America (ex-forex): Growth slowed from 9.5% to 7.6%, confirming weakening US consumption.
- International retail: Nominal growth plunged 3pct to 4.9%, but adjusted for forex, growth was 8% (just ~1pct slowdown), aligning with North America.

Thus, while growth is clearly softening in Amazon’s core markets, absolute performance wasn’t as dire as tariff-wary sell-side forecasts.

4. 1P & 3P retail slowed; ads & subscriptions held up better:
- 1P retail and 3P marketplace services (constant currency) both decelerated 2pct QoQ to 6% and 7%, respectively, reflecting weak consumption. The narrowing gap between the two suggests 3P monetization has plateaued, consistent with Amazon’s pledge not to raise 3P fees until 2025.
- Subscription revenue grew 9.6% YoY (flat QoQ; +1pct ex-forex), showcasing model resilience.
- Ad revenue rose 17.7% YoY (just -0.3pct QoQ), beating expectations of 16.2%. Like Netflix and ad giants (Google/Meta), subscriptions and ads demonstrate early-cycle defensibility.

5. Overall profits edged above guidance: Operating income of $18.4B topped consensus ($17.5B) and guidance ($18.0B), driven by AWS’s $1B upside. However:
- North America retail margins fell to 6.3% (-1.7pct QoQ), below expectations (6.5%), signaling an end to the two-year margin expansion cycle amid renewed fulfillment investments.
- International margins held flat at 3% (above consensus of 2.8%), suggesting room for long-term improvement.

6. Capex remained elevated at $26B (above $25.1B consensus), providing reassurance to semiconductor and AI supply chains.

7. Q2 guidance: Revenue of $159–164B (midpoint in line; +9.1% YoY) implies <~0.9pct slowdown ex-forex. Profit guidance of $13.0–17.5B (high end below $17.7B consensus) points to margin contraction (10.8% vs. Q1’s 11.8%)—watch for details on AWS vs. retail drivers.

Dolphin Research’s view:

Amazon’s quarter was largely uneventful. Growth slowed across retail (though ads/subscriptions were resilient), and AWS failed to reaccelerate. Profits slightly beat thanks to AWS margins, but North America retail margins deteriorated faster than expected, hinting at a reinvestment cycle. With tariffs looming, Q2 revenue guidance was surprisingly firm, but margin guidance disappointed. AWS’s growth trajectory remains the key debate—if hyperscale Capex doesn’t translate into reacceleration, patience will wear thin. Retail, more exposed to macro/tariffs, faces near-term pressure despite recent outperformance. At ~29x 2025 P/E, valuation isn’t cheap for a margin-downturn cycle.

Full analysis below:

I. AWS: No growth surprises, but profit strength

AWS revenue grew 16.9% YoY (-2pct QoQ; below 17.3% consensus), with no signs of reacceleration. Like Azure, AWS must prove its massive Capex will fuel growth—but unlike Microsoft, AWS isn’t expected to reaccelerate until 2025. GPU/data center bottlenecks may delay AI demand fulfillment.

Yet AWS margins surged to 39.5% (+2.6pct QoQ; +4pct vs. consensus), defying depreciation headwinds. Management must clarify whether this is sustainable.

II. Retail slowdown, but ads/subscriptions resilient

Retail revenue grew 6.9% YoY (-2.2pct QoQ; better than feared). North America (ex-forex) slowed to 7.6% (from 9.5%), while international adjusted growth was 8% (-1pct QoQ). 1P/3P growth converged at mid-single digits, confirming weak consumption and plateauing 3P monetization. Ads (+17.7% YoY) and subscriptions (+9.6%) outperformed.

III. North America margins fell; AWS saved the day

Overall revenue of $155.7B (+8.6% YoY) slightly beat (8.3% expected). Operating income of $18.4B topped guidance ($18.0B), entirely due to AWS’s $1B upside. North America retail margins dropped to 6.3% (-1.7pct QoQ), while international held at 3% (above 2.8% expected).

IV. Costs rising; Capex stays high

Gross margins of 50.6% (+1.3pct YoY) beat (50.2% expected) despite higher depreciation (9.2% of revenue, +0.9pct QoQ). Fulfillment costs rose 0.2pct YoY, signaling reinvestment. Capex of $26B (above $25.1B consensus) supports AI/semiconductor demand.

Past Dolphin Research on Amazon:

Earnings Reviews

Feb 7, 2025: Amazon: Heavy Cloud Investments—Is the Profit Boom Over?

Nov 1, 2024: Amazon: Profits Soar, but Capex Storm Clouds Gather

Disclosures: Dolphin Research Disclaimer