Amazon's operating profit increased by 38%, dispelling doubts! Generative AI gradually integrates into core products.

Zhitong App has learned that the US tech giant Amazon announced strong fourth-quarter performance for 2023 on Friday morning, along with a revenue and profit outlook that exceeded analysts' expectations. This indicates that under the leadership of CEO Andy Jassy, Amazon's persistent cost-cutting efforts and focus on high-yield service products have been well received, reshaping this once extravagant tech company. Overall, the holiday shopping season has boosted the online revenue of this e-commerce giant, while Amazon Web Services (AWS) revenue has surged by 13%, significantly alleviating analysts' concerns about slowing demand for Amazon's cloud services and a declining growth rate. Additionally, advertising revenue has continued to grow for four consecutive quarters.

In terms of the most closely watched performance expectations, for the current quarter ending in March, Amazon expects operating profit to reach between $8 billion and $12 billion, with total revenue projected to reach as high as $143.5 billion (expected range of $138 billion to $143.5 billion), reflecting an expected total revenue growth rate of 8% to 13%. Data compiled by institutions shows that Amazon's latest expectations align with analysts' forecasts, with an average operating profit expectation of approximately $9.12 billion and a total revenue expectation of $142 billion.

The latest financial report data shows that in the fourth quarter of 2023, Amazon achieved a year-on-year total revenue growth of 14% to $170 billion, about twice the growth rate of expenses, indicating that cost reduction measures have boosted profits without hindering performance growth. Among them, Amazon's online revenue in the fourth quarter grew by 9% year-on-year to $70.5 billion, surpassing analysts' average expectations. Amazon's Q4 net profit reached $10.6 billion, compared to just $278 million in the same period last year, and GAAP earnings per share jumped from $0.03 in the same period last year to $1, exceeding analysts' average expectation of $0.80.

Bloomberg Intelligence analyst Poonam Goyal commented after Amazon's performance announcement: "Amazon has provided an optimistic outlook for the first quarter and has shown robust growth in its online business, cloud services, and advertising business. Amazon's fourth-quarter performance is solid." Operating profit has been boosted. We expect that in 2024, with the promotion of AWS cloud computing services and an increase of 20% or more in advertising revenue, we believe that the company's profit may further expand. Amazon AWS has an operating profit margin of nearly 30%, while the profit margin for advertising business is close to 50%."

With strong quarterly financial reports and optimistic performance outlook, Amazon's stock price rose nearly 10% in after-hours trading in New York. The stock closed at $159.28 on Thursday, up 2.63%. After a surge of 81% in 2023, the stock has risen more than 5% this year.

Holiday shopping season boosts Amazon's online revenue expansion, AWS dispels doubts with strong performance

From Amazon's financial data, consumer demand was strong during the 2023 year-end holiday shopping season, and Amazon's online revenue in the fourth quarter of 2023 increased by 9% YoY to $70.5 billion, exceeding analysts' average expectations. Amazon's operating profit in the fourth quarter increased to $13.2 billion, with a YoY growth rate of 383%, while analysts' average expectation was $10.5 billion. In the same period last year, Amazon's operating profit was only $2.7 billion.

Amazon's core retail business - online store revenue accelerates expansion YoY

Jesse Cohen, a senior analyst at Investing.com, said: "Most importantly, despite concerns plaguing the technology industry and the e-commerce retail sector that Amazon focuses on, Amazon's performance has unexpectedly been strong." "The financial results indicate that ongoing cost-cutting measures are having a positive impact on Amazon's business prospects."

Under the leadership of Andy Jassy, Amazon has been working hard to reduce expenses, including cutting more than 35,000 jobs, in order to improve profitability and withstand competition from global e-commerce newcomers Temu and TikTok.

Amazon's layoffs plan is currently ongoing. Earlier this month, Amazon announced that it would lay off hundreds of employees in its Prime video streaming and studio business units, as well as its Twitch game streaming service. In November last year, the company significantly reduced jobs in its music and gaming departments, as well as positions in charge of its voice assistant Alexa. Amazon stated that as of 2023, the company has approximately 1.53 million full-time and part-time employees, a 1% decrease from the same period last year. The more significant "earnings report positive" is that Amazon's most powerful profit-making service, Amazon Web Services (AWS), experienced a significant rebound after several disappointing quarters. The financial data shows that AWS achieved a YoY revenue growth of 13% to $24.2 billion in the fourth quarter. The operating profit of AWS in Q4 reached an impressive $7.167 billion, with a YoY growth rate of 38%.

In terms of MoM revenue and operating profit, AWS has achieved consecutive growth for three quarters, greatly alleviating analysts' concerns about the slowdown in demand for Amazon's cloud services and the downward trend in growth rate. This growth surpasses the revenue growth of AWS in previous quarters.

However, Sky Canaves, a senior analyst at Insider Intelligence, expressed some lingering doubts about whether AWS can stand firm in the fierce competition with competitors such as Microsoft Azure and Google Cloud, despite this "moderate acceleration trend." Statistics show that Amazon AWS leads the global cloud computing service market share, with Microsoft Azure closely following.

In order to diversify its total revenue sources, Amazon, headquartered in Seattle, has increased its efforts in advertising business by allowing merchants to place ads on its shopping website. It also started allowing merchants to advertise on its Prime Video streaming service last month. In the three months ending on December 31st, the advertising revenue of Amazon's advertising business achieved a YoY growth of 27% to $14.7 billion, marking four consecutive quarters of accelerated growth in advertising revenue.

Analyst Canaves stated, "The high-profit advertising business has been greatly boosted by the strong demand from rapidly growing third-party marketplace sellers."

In addition, Amazon's general and administrative expenses decreased by approximately 10% in the fourth quarter, while marketing and sales expenses remained roughly the same as the same period last year. Technology and content expenses, including software developer salaries and server GPU and other hardware expenses, only grew by 6%, which is lower than the high growth rate of 38% at the beginning of 2023. AI, the future is expected to become Amazon's ace "revenue tool"?

Brian Olsavsky, Chief Financial Officer of Amazon, is optimistic about the growth rate of AWS this year. Olsavsky said that people seem to be very interested in Amazon AWS cloud services and AI products generated on the AWS platform. He said, "We are starting to see customers reduce their cost optimization efforts and shift more discussions to the cloud migration trends that may have been put on hold in recent years."

As consumer-centric generative AI applications such as ChatGPT and Google's Bard continue to emerge, more and more technology companies around the world are participating in the AI technology trend, and Amazon is no exception. Similar to Microsoft's AI product strategy deployment plan, Amazon is also trying to integrate generative AI, a heavyweight tool, into its core products, such as AWS cloud computing services and the Amazon.com e-commerce platform.

Amazon has now deeply integrated the related technologies of generative AI into its AWS cloud computing services, demonstrating a series of positive progress in foundational models, computational enhancements, storage, and networking.

AWS previously launched Amazon Bedrock, a comprehensive generative AI service that allows customers to access foundational models (FMs) from leading AI companies using a single API. These models are pre-trained and can be applied to various core purposes, from search to content creation to drug discovery. Amazon Bedrock aims to help users easily access and leverage high-performance foundational models (FMs) from leading AI companies such as AI21 Labs, Anthropic, Cohere, Meta, Stability AI, and Amazon. By providing unified API access to these models, Amazon Bedrock allows developers to flexibly use different FMs and easily upgrade to the latest model versions. Specific use cases include text generation, image generation, dialogue generation, and more.

Amazon Bedrock also provides the ability to create and manage agents that can perform complex business tasks without writing any code. Amazon Bedrock allows AWS customers to integrate and deploy generative AI capabilities into their familiar AWS services without managing any infrastructure hardware.

Similar to ChatGPT, Amazon Bedrock provides generative AI capabilities, but its scope is broader, not limited to AI text generation. It supports the customization of models based on user-specific data to provide differentiated and personalized user experiences. For example, users can fine-tune the model to provide more relevant FM responses using Retrieval-Augmented Generation (RAG), or create proxies to perform complex tasks across company systems. Amazon Bedrock also supports fine-tuning, model call logging, pre-deployment throughput purchase, and support for multiple AWS regions.

Earlier before the earnings report was released, Amazon announced that it was testing a generative AI shopping assistant called Rufus, emphasizing that the assistant "has been trained on Amazon's entire product catalog and shopping assistance features" and has been tested in collaboration with key customers using the Amazon mobile app.

According to the general view of Wall Street analysts, Amazon's stock price is expected to recover strong momentum after a challenging start in 2024, and may gradually enter a good phase and return to its all-time high stock price set over two years ago. Companies such as Bank of America, Citigroup, Deutsche Bank, Goldman Sachs, and JPMorgan have rated it as one of the hottest e-commerce or internet stocks in 2024, while Oppenheimer and Roth MKM have rated it as one of the most popular large-cap stocks. The bullish confidence of Wall Street banks in the future prospects of Amazon's stock price mainly comes from artificial intelligence. They believe that Amazon is well-positioned in this global AI competition with its self-developed AI chips and innovative generative AI products deeply integrated with the AWS cloud platform.

Expected data compiled by investment research platform Seeking Alpha shows that Wall Street analysts have a consensus rating of "strong buy" for Amazon, with an average target price of $183.85, implying a potential increase of 15.43% in the next 12 months, and getting closer to Amazon's all-time high stock price of $188.65 set in July 2021, with a highest target price of $230. Recently, Morgan Stanley released a research report expressing optimism about the trend of Amazon's stock price, giving Amazon a target price of $185 for the next 12 months.