After the weak results of Google, Meta, Amazon is becoming the backbone of the market?

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After the US stock market closed on October 26th, Amazon released its third-quarter earnings report for 2023. While AWS maintained steady growth in revenue, its profits improved significantly. The retail sector also saw improvements in both revenue and profits, with the progress in profit recovery exceeding expectations. The key points are as follows:

Profits exceeded expectations once again: In terms of overall performance, Amazon achieved a total revenue of $143.1 billion this quarter, with a year-on-year growth mainly driven by its retail business, increasing by a slight 1.8% to 12.6%, slightly higher than the market's expectation of $141.6 billion. The continued improvement in growth is mainly due to the shift from negative to positive growth influenced by exchange rates.

The overall operating profit reached $11.2 billion, far exceeding the company's previous guidance of $8.5 billion. The speed and extent of profit recovery exceeded expectations once again, mainly due to the excellent cost reduction effect.

Stable revenue and significant profit increase for AWS: This quarter, AWS achieved a revenue of $23.1 billion, with a growth rate maintained at 12%. However, considering the significant decline in the base of the third quarter of last year, the growth trend is still slowing down. From this perspective, the impact of European and American companies reducing IT expenditure still exceeds the incremental demand brought by the AI wave. In a horizontal comparison of the three major cloud service providers, Azure increased by 1% after excluding the impact of exchange rates, while GCS experienced a significant slowdown. In comparison, AWS maintained a steady growth rate, which is completely in line with market expectations and can be considered a moderate performance.

However, in terms of profits, AWS achieved an operating profit of $7 billion this quarter, with an operating profit margin significantly increased to 30%, far exceeding the market's expectation of $5.65 billion. This is one of the highlights of this quarter's earnings report. Dolphin Research found that this is mainly due to a significant decrease in research and development expenses. The significant increase in profits is likely achieved through cost reduction measures such as layoffs and expense control. For specific details, please refer to the explanations provided by the management during the conference call.

Continued profit recovery in the retail sector: The profit recovery in the retail sector is also continuing. Specifically, the operating profit margin of the North American retail sector continued to increase from 3.9% to 4.9%, achieving an operating profit of $4.3 billion. The rate of loss reduction in the international retail sector is also quite impressive, with the loss rate narrowing to 0.3% this quarter, with a loss of only $100 million. It is only a matter of time before it turns a profit.

Exchange rate reversal, continued acceleration in the retail sector: This quarter, Amazon's retail sector achieved a revenue of $120 billion, with a year-on-year growth rate of 12.6%, showing a continuous recovery and an increase of 2% compared to the previous quarter.

In terms of regions, the international region continues to experience rapid revenue recovery this quarter, with a growth rate of 16%. The North American region maintained a revenue growth rate of 11%, which is basically consistent with the previous two quarters. However, the main reason for the improvement in revenue in the international region this quarter is still the impact of the US dollar exchange rate. Excluding the impact of exchange rates, the growth rate of international business is actually 11%, which is basically the same as the previous quarter. 5. Guiding profit continues to recover: For the performance guidance of the fourth quarter, the company expects the median revenue to be 163.5 billion, slightly lower than the market expectation of 166.6 billion, indicating that the company is not very optimistic about revenue growth. However, the operating profit guidance range is 7-11 billion, continuing to grow significantly compared to the previous quarter's guidance. Based on recent experience, the actual profit delivered by the company is at least close to the upper limit of the guidance, indicating that the profit in the fourth quarter is likely to continue to rise.

Dolphin Research's view:

Overall, the biggest highlight of Amazon's earnings report this quarter is the significant improvement in profit, which exceeded expectations. The profit margins of AWS, international retail, and local retail have all improved. This once again verifies that after the company reversed the previous excessive investment that led to uneconomical operating scale, there is still a huge room for profit improvement through cost control and operational efficiency enhancement.

On the other hand, the growth of AWS revenue is still relatively weak, and the acceleration of revenue in the retail sector is mainly due to the reversal of non-operating factors such as exchange rates. Looking ahead, whether the US economy will weaken is a "Sword of Damocles" that remains uncertain, and the possibility of weak consumer spending cannot be ignored. The company's revenue guidance for the fourth quarter is also lower than expected.

However, overall, the performance of this earnings report is far beyond expectations, and the significant profit of 11.2 billion cannot be ignored. It is highly probable that the company's future profits will continue to exceed expectations, so the company's stock price is likely to rise for a period of time after the performance. However, the beta risk of the macro economy cannot be ignored at the current price level, and the market does have concerns, as seen from the post-market stock price trend. It is wise to take profits when the stock price approaches the upper limit estimated by Dolphin Research and not chase after it.

Detailed comments are as follows:

Slowdown in growth has not yet reversed, but profits have significantly improved.

AWS revenue this quarter was $23.1 billion, with a growth rate of 12%, slightly higher than the previous quarter's increase of 0.1 percentage points. However, considering that the base of the third quarter of last year was significantly lower, the growth of AWS revenue is still slowing down. From this indicator, the impact of European and American companies reducing IT expenditure still outweighs the incremental demand brought by the AI wave.

When comparing the performance of the three major cloud service providers in the United States, it can be seen that their performances are not consistent. Microsoft's Azure has shown a significant acceleration mainly due to the reversal of negative impact from exchange rates (excluding the impact of exchange rate improvement, the growth rate is only about 1 percentage point), while GCS has shown a significant slowdown (possibly due to Google's slower progress in AI-related products). In comparison, AWS is in the middle, with no improvement or decline in growth rate, which is completely consistent with market expectations and can be considered a moderate performance.

However, in terms of profit, AWS achieved an operating profit of $7 billion this quarter, with an operating profit margin of 30%, far exceeding the market's expected $5.65 billion, which is one of the highlights of this quarter's earnings report. Based on the changes in the company's costs and expenses this quarter, Dolphin Research found that the gross profit margin did not change much, but the research and development expenses decreased significantly. Therefore, Dolphin Research speculates that the significant increase in profit may be mainly achieved through cost reduction measures such as layoffs and expense control. For specific details, please refer to the explanations from the management during the conference call.

In summary, AWS's cloud business has delivered a stable revenue and a significant increase in profit this quarter.

Second. with the release of operating leverage, the inflection point of the retail business has arrived.

Although the performance of the cloud business is not surprising, the surprise is that the retail business, which has been sluggish for nearly two years, has shown obvious signs of operational efficiency and performance improvement as Dolphin Research expected. This quarter, Amazon's retail segment achieved a revenue of $120 billion, with a year-on-year growth rate of 12.6%, showing a continuous recovery and an acceleration of 2 percentage points compared to the previous quarter.

Looking at different regions, this quarter's revenue growth in the international region is still rapidly recovering, with a growth rate of 16%, leading ahead of the North American region. The North American region, on the other hand, maintained a revenue growth rate of 11%, which is basically consistent with the previous two quarters.

However, the main reason for the improvement in revenue in the international region this quarter is that the impact of the exchange rate has changed from negative to positive. Excluding the impact of exchange rates, the actual growth rate of international business this quarter is 11%, which is basically consistent with the previous quarter.

Benefiting from the favorable exchange rate in the international region, all the sub-segments under the retail segment have shown a rebound in growth. The detailed situation is as follows:

  1. Online self-operated retail revenue has increased to 7.1% this quarter, showing a continuous and significant recovery.
  2. Third-party seller services revenue has grown by 19.8% year-on-year, with an increase of approximately 1.7 percentage points compared to the previous quarter.
  3. Only subscription services have grown by nearly 14.2% year-on-year. Since revenue is based on the existing membership base, the growth rate has changed more gradually.
  4. As for the advertising business with the best growth potential, its revenue this quarter reached 12.1 billion, with a YoY growth rate of 26.3%, showing the most significant acceleration. On one hand, the overall retail business is recovering, and on the other hand, with the general improvement of monetization on global e-commerce platforms, it is highly likely that Amazon's overall monetization rate has also increased.

Combining the cloud business and retail business, Amazon achieved a total revenue of 143.1 billion US dollars this quarter. With the recovery of the retail business, the YoY growth rate increased to 12.6%, slightly higher than the market's expected 141.6 billion.

Third, the retail sector's profit continues to improve significantly!

If we look at the revenue level, the recovery of the retail business mainly relies on non-operational factors such as favorable exchange rates. However, in terms of profit, the rapid recovery of the retail sector's profit truly demonstrates the company's solid strength. Specifically, the company achieved an operating profit of 11.2 billion US dollars this quarter, far exceeding the market's expectations and the company's previous guidance of 8.5 billion as the upper limit. Even though Dolphin Research had an optimistic attitude towards the performance, the profit expectation was only around 9.5-10 billion, which shows that the actual performance exceeded expectations.

Looking at different sectors, the operating profit of AWS cloud business reached 7 billion, greatly exceeding expectations. Moreover, the operating profit margin of the North American retail sector also increased from 3.9% to 4.9%, achieving an operating profit of 4.3 billion.

In addition, the international retail sector's rate of loss reduction is also quite impressive. The loss rate this quarter has narrowed to 0.3%, with a loss of only 100 million US dollars. It is only a matter of time before it turns losses into profits.

Since the first quarter, Dolphin Research has believed that with Amazon's significant layoffs, slowdown in investments in logistics and warehousing, as well as optimization of delivery efficiency and increase in logistics and warehousing fees charged to third-party sellers, the company will reverse the previous uneconomical scale caused by excessive investments and quickly return to profitability. This quarter further validates the above logic.

Breaking down the costs and expenses,

1) The gross profit margin for this quarter is 47.6%, although there has been a significant improvement YoY, it has actually decreased MoM, so there hasn't been much improvement at the gross profit level. The gross profit achieved is 68.1 billion, slightly higher than the market's expectation of 67 billion.

However, there is a significant decrease in expenses. The fulfillment expense ratio has slightly decreased (within 1 percentage point), while the R&D expense ratio has decreased significantly from 16.3% to 14.8% MoM. As for administrative and sales expenses, both the absolute values have decreased YoY and MoM. It can be seen that the company's cost reduction efforts are still very significant.

At the same time, the fixed asset investment for this quarter is 11.3 billion, although it has slightly increased MoM, it has decreased by 1/4 YoY compared to the uncontrolled investment from 2020 to 2022, which also verifies that the company is still in the process of cost control and efficiency improvement.

Dolphin Research's previous Amazon research:

Earnings Report Analysis:

August 5, 2023 conference call "Amazon: Retail Efficiency Improvement, AI Will Be Heavily Invested"

August 5, 2023 earnings report review "Retail Backbone Strong, Amazon is on a Roll Again"

April 28, 2023 conference call "Amazon: Cloud & AI & Efficiency and Cost Reduction are the Three Main Themes"

April 28, 2023 earnings report review "Amazon: Retail Profit Soaring, But Can't Lift the "AWS" That's Paralyzed?"

February 3, 2023 conference call "Amazon: Controlling Cost Investment Without Harming Prospects"

February 3, 2023: Is there a future for Amazon without Bezos?

October 26, 2022: Can Microsoft safely navigate the economic downturn? (1Q23 conference call summary)

October 26, 2022: No one is immune to economic cycles, and Microsoft is struggling too

July 29, 2022: Capital investment will continue to grow, but Amazon will be more cautious (conference call summary)

July 29, 2022: With an iron-fisted layoff of 100,000 troops, Amazon finally "recovers"

April 29, 2022: Even American giants talk about cost reduction and efficiency improvement, Amazon conference call summary

April 29, 2022: Inflation "eats up" profits, this time AWS can't save Amazon

In-depth Research

February 28, 2023: Microsoft and Amazon fall, is it time for Airbnb & Uber to take the lead?

May 30, 2022: Macro headwinds are too strong, even Amazon's cloud can't hide

December 3, 2021: Both are not profitable, why is Amazon more favored than Alibaba?

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