Amazon (NASDAQ: AMZN) witnessed a surge in its stock price after hours on Tuesday following its impressive first-quarter earnings report. Beating estimates on both top and bottom lines, the company demonstrated significant growth in profit margins. The revenue for the quarter rose by 13% to a staggering $143.3 billion, surpassing the estimated $142.4 billion. Furthermore, the earnings per share (EPS) saw a substantial leap from $0.31 to $0.98, outstripping the consensus of $0.82, despite a $2 billion non-cash loss in its investment in Rivian.
Looking beyond the surface, let’s delve deeper into why Amazon is positioned as an attractive investment opportunity following its latest financial report.
Image source: Amazon.
1. Surging Profit Margins Across Various Sectors
Throughout a significant part of Amazon’s journey, the company operated close to breakeven, focusing on market share expansion and growth investments. However, in recent years, the tide has turned, with all three business segments witnessing substantial margin growth in the quarter. This uptick can be attributed to an upswing in macroeconomic conditions, cost-saving measures including layoffs, and a shift towards higher-margin businesses outgrowing their lower-margin counterparts.
In its North America segment, primarily comprising e-commerce, revenue surged by 12% to $86.3 billion, and operating income saw an astounding rise from $898 million to $5 billion, fueled by robust growth in higher-margin sectors like third-party seller services (up 16%) and advertising (up 24%).
The international segment, historically a loss-making endeavor, turned a profit, switching from an operating loss of $1.2 billion to a profit of $903 million. Mature international markets reaching profitability drove this improvement. Furthermore, Amazon Web Services (AWS), the cloud-infrastructure arm, witnessed a near doubling of operating income from $5.1 billion to $9.4 billion.
2. Accelerating Revenue Growth in AWS
Amazon’s AWS has been a primary growth driver and profit generator for the company. Although growth in the cloud business had slowed over recent years due to customer caution, the first-quarter earnings report revealed a revitalized growth trajectory. With AWS revenue growing by 17% to $25 billion, this quarter demonstrated the fastest growth rate since Q4 2022.
During the earnings call, CEO Andy Jassy highlighted that companies had completed cost optimizations from the prior tech recession, shifting focus towards expansions. The transition from on-premise to cloud-based IT also gained momentum after a brief pause during uncertainties surrounding the COVID-19 pandemic onset. With significant long-term opportunities in cloud computing, AWS appears well-positioned to reap the benefits post a temporary setback.
3. Declining Valuation Offers Investment Appeal
With burgeoning profits, Amazon’s valuation is on a downward trend, aligning with a more reasonable level compared to its peers. While still relatively pricier than most “Magnificent Seven” stocks, the current P/E ratio of 50 is expected to further decrease as margins expand and revenue grows.
A lower P/E ratio presents not only a more attractive entry point for investors eyeing Amazon stock but also insulates the stock from significant drops in the wake of disappointing earnings reports. Although not a bargain, Amazon’s valuation is notably more rational than it was in previous years, likely appealing to a broader investor base.
Considering an Amazon Investment
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