Amazon's Q3 earnings significantly exceeded expectations, with accelerated growth in cloud revenue, rising 6% in after-hours trading | Earnings report insights

On Thursday, October 31, the tech giant Amazon, which is globally promoting e-commerce and cloud services while actively participating in the "AI arms race," released its third-quarter financial report for 2024, concluding the earnings season for the "Big Seven" tech companies in the U.S. stock market, alongside Apple, except for Nvidia.

Due to Amazon's third-quarter revenue exceeding expectations and profits far surpassing forecasts, with AWS and advertising revenue generally meeting expectations, and a year-on-year revenue growth trend in cloud services accelerating, the midpoint of the fourth-quarter operating profit guidance was higher than market predictions, leading to a 6% increase in after-hours trading.

The company stated that it expects capital expenditures for 2024 to be $75 billion, driven by the AWS cloud division.

1 ) Key Financial Data

Revenue: Third-quarter net sales increased by 11% year-on-year to $158.9 billion, exceeding market expectations of $157.29 billion, marking the fifth consecutive quarter of low double-digit percentage growth, slightly slowing from last year's 12.6% growth rate.

EPS: The diluted earnings per share (EPS) for the third quarter was $1.43, a year-on-year increase of 52%, far exceeding the market expectation of $1.14, although it had previously seen nearly 94% year-on-year growth in the second quarter and a 216% increase in the first quarter.

Operating Profit: The third-quarter operating profit increased by over 55% year-on-year to $17.4 billion, higher than the market expectation of $14.75 billion and the company's guidance upper limit of $15 billion, although it had previously seen 91% year-on-year growth in the second quarter and a 219% increase in the first quarter.

Operating Profit Margin: The operating profit margin for the third quarter was approximately 11%, an increase of 3.2 percentage points year-on-year, exceeding the market expectation of 9.34%, compared to 9.9% in the second quarter.

2 ) Segment Revenue

AWS Cloud Business: Third-quarter net sales increased by 19% year-on-year to $27.45 billion, slightly below the market expectation of $27.49 billion or a growth of 19.2%, but roughly in line with the previous quarter's growth rate, accelerating from nearly 17% year-on-year growth in the first quarter and 12% growth in the third quarter of last year.

Some netizens claimed that Amazon AWS generated over $100 billion in revenue for the first time in the past 12 months.

Advertising: Third-quarter net sales increased by 19% year-on-year to $14.3 billion, meeting market expectations, with growth exceeding the company's core retail business. This growth rate was roughly in line with the 19.5% increase in the second quarter but cooled from approximately 24% year-on-year growth in the first quarter.

3 ) Performance Guidance

Revenue: The expected net sales for the fourth quarter are between $181.5 billion and $188.5 billion, representing a year-on-year increase of 7% to 11%. The midpoint of the range, $185 billion, is below analysts' expectations of $186.36 billion, marking the fourth consecutive quarter of issuing revenue guidance that fell short of expectations

There are also analyses stating that Amazon's official guidance will represent the slowest revenue growth since December 2022 for the fourth quarter.

Operating Profit: It is expected that the operating profit for the fourth quarter will be between $16 billion and $20 billion, compared to $13.2 billion in the same period last year, with the midpoint of the range at $18 billion exceeding analysts' expectations of $17.49 billion.

AWS's Q3 profit margin hits a record high, and international market profit margins surge, boosting the company's overall operating profit margin to an all-time high

Andy Jassy, the President and CEO of Amazon after Bezos, previewed in the earnings report that he will share over 100 new cloud infrastructure and AI features at the AWS re:Invent event a week after Thanksgiving in the U.S. He also stated:

"We kicked off the year-end holiday shopping season with the largest Prime Big Deal Days member promotion in history and launched a new Kindle e-reader, which has far exceeded the company's expectations. More surprises are coming, including tens of millions of e-commerce transactions, live broadcasts of NFL football games on 'Black Friday,' and coverage of the U.S. election day by invited celebrities on Prime Video."

Financial blog Zerohedge found that Amazon's overall operating profit margin rose to 11%, surpassing the previous record of 10.7% in the first quarter of this year, setting a new historical high. The strong guidance for the fourth quarter, which coincides with the year-end holiday shopping season, boosted the stock price in after-hours trading.

Among them, the operating profit margin for AWS cloud services increased from 35.5% to 38.1%, setting a historical high for the department. AWS's third-quarter operating profit of $10.4 billion also exceeded analysts' expectations of $9.12 billion. Meanwhile, Amazon's international market profit surged to 3.63%, the highest level since the COVID-19 pandemic, contributing to the overall operating profit margin reaching a new high.

Other performance indicators from Amazon's Q3 report include:

Net sales from online stores were $61.41 billion, a year-on-year increase of 7.2%, exceeding expectations of $59.64 billion;

Net sales from physical stores were $5.23 billion, a year-on-year increase of 5.4%, exceeding expectations of $5.17 billion;

Net sales from subscription services were $11.28 billion, a year-on-year increase of 11%, exceeding expectations of $11.17 billion;

Net sales in the North American market were $95.54 billion, a year-on-year increase of 8.7%, exceeding expectations of $95.22 billion; operating profit margin was 5.9%, higher than the same period last year and exceeding expectations of 5.6%;

The net sales in the international market reached $35.89 billion, a year-on-year increase of 12%, exceeding the expected $34.55 billion; the operating profit margin was 3.6%, higher than the same period last year and far exceeding the expected 1.2%;

However, the net sales for services to third-party sellers were $37.86 billion, a year-on-year increase of 10%, lower than the expected $38.22 billion.

What does Wall Street think? Focus on AWS and advertising revenue, but concerned about slowing retail profit margins and other investments eroding profits

Although Amazon's stock fell 3.4% to a weekly low on Thursday, it has risen over 22% this year, outperforming the S&P 500 and Nasdaq, which have both seen about a 20% increase during the same period, while the Dow Jones, where Amazon is a component, has risen nearly 11%.

Analysts say that while Amazon's core retail business faces uncertainties regarding consumer spending health, Wall Street remains generally optimistic about the stock, particularly praising CEO Andy Jassy's cost-cutting measures.

Mainstream brokerages like JP Morgan and Stifel have listed Amazon as a preferred stock. Among 48 analysts, 46 recommend buying, two suggest holding, and none rate it as a sell, with a target price of $224 representing about a 16% upside potential.

Amazon executives warned during the release of the second-quarter report in August that due to an unusually high number of news events in the U.S. and internationally, third-quarter sales could be impacted as shoppers' attention is diverted by news events such as the Paris Summer Olympics and the Trump assassination attempt.

CEO Jassy has consistently emphasized that the company is working to accelerate AWS growth, stating, "As businesses continue to modernize their infrastructure and migrate to the cloud while leveraging new generative AI opportunities, AWS will continue to be the preferred choice for customers."

From 2022 to this year, Amazon has initiated the largest layoff plan in the company's history, with over 27,000 employees laid off. Compared to the company's founder Jeff Bezos, current CEO Jassy has taken a firmer stance on high-cost but unproven businesses. This year, Amazon continues to restructure its teams, announcing last week that it will discontinue the Amazon Today fast delivery service and implement minor layoffs.

However, Zerohedge believes that e-commerce fulfillment costs in the third quarter increased by 11% year-on-year to $24.66 billion, exceeding market expectations of $24.35 billion, indicating that "more cost optimization measures can be taken in the future." Additionally, analysts note that investors are most concerned about Amazon's advertising and cloud platform strength, but are also worried that slowing retail profit margins and increased investments in other areas will erode profits.

Among mainstream investment banks, Goldman Sachs, Evercore, Wedbush, Bank of America, and JP Morgan are optimistic about the accelerated expansion of AWS driven by AI, with both advertising and AWS being high-margin businesses, which is favorable for Amazon in both the short and long termHowever, Wells Fargo has rarely downgraded its rating to "Hold" before the earnings report, also giving the lowest target price on Wall Street of $183, mainly concerned that the profit margin expansion of North American retail business in recent years will not be linear, and the rapidly growing digital advertising business and logistics will also face pressure, especially as Amazon's pricing power may be limited by Walmart's competition in the e-commerce sector.

In addition, Wall Street is eager for Amazon to share the latest plans for its Project Kuiper satellite internet service, although Amazon believes the investment amount is $10 billion, while some third-party analysts worry that it may require a doubling of the investment. Oppenheimer analysts pointed out that this plan, which benchmarks Elon Musk's SpaceX Starlink, remains a huge long-term revenue opportunity, with a target audience of over 1 billion people