AMAZON | AMZN & AI
Updated
We are 30% up since my last AMZN analysis and hit all targets as usual
Amazon pleasantly surprised most investors with its earnings report, boosting confidence in the stock. Revenue increased by 12.5% Year-Over-Year, while the adjusted earnings per share surged from $0.31 to $0.98, more than tripling. This significant improvement in profitability was attributed to robust operating leverage, resulting in expansion of both gross and operating margins compared to the previous year.
I'd like to emphasize significant top-line advancements because when revenue expands across diverse dimensions and business sectors, it indicates optimism. This demonstrates that the company isn't solely dependent on one or two primary growth factors but rather utilizes a diversified revenue mix, enhancing its ability to withstand potential external disruptions. Looking at the segments individually, Amazon experienced revenue growth in both North America (increasing by 12% YOY) and International markets (rising by 10% YOY). Additionally, Amazon Web Services , a crucial growth driver in recent years, achieved a strong 17% YOY growth, reaching $25 billion.
Revenue performance remained robust across all major business sectors. Amazon experienced growth in both its Services division (up 17% YOY) and its Product division (up 7% YOY). Furthermore, revenue from digital advertising surged by 24% year-over-year to reach $11.8 billion. Sales from physical stores, online sales, and Prime memberships also saw YOY revenue growth. This indicates a solid momentum in revenue growth across all key areas.
Looking ahead, let's delve back into the segments. Amazon commands a commanding 37.8% share of the global e-commerce market, solidifying its dominance in this sector. Its status as a pioneering e-commerce entity has provided a strong foundation, further bolstered by substantial investments in innovation. With an ecosystem boasting 310 million active users and 2 million active sellers, Amazon's position in global ecommerce appears secure. Consequently, its e-commerce segment is poised to benefit from positive long-term trends, with the global market projected to grow at a compound annual growth rate of 15.9% by 2029.
Now, let's shift focus to the company's standout performer, its cloud business. AWS maintains its dominant position in the global cloud infrastructure market, commanding a 31% market share. As competition intensifies, all major cloud service providers are deeply engaged in the race for AI supremacy, significantly ramping up investments in data center infrastructure. Amazon, in particular, has unveiled plans to allocate up to $150 billion towards expanding its data center infrastructure over the next decade, marking one of the most ambitious financial commitments seen among tech giants thus far.
Undoubtedly, investments of such magnitude carry inherent risks for any company, as there's always a chance that they may not yield the desired returns. Nevertheless, Amazon has built a reputation for the exceptional efficiency of its investments. Over the past 15 years, spanning from 2009, Amazon has poured approximately $400 billion into research and development (R&D). Remarkably, during this period, Amazon's market capitalization surged from roughly $30 billion to an astounding $1.7 trillion. This stellar track record underscores the company's adeptness at translating R&D investments into substantial value creation for its shareholders.
However, AWS's increasing investments in capital expenditures aka CapEx and research and development (R&D) are poised to bolster the growth trajectory of the company's cloud business. In addition to bolstering CapEx and internal R&D, Amazon recently augmented its investment in Anthropic by $2.75 billion. Anthropic, seen as a close competitor to the leading OpenAI, recently rolled out its Claude chatbot in Europe, offering support for multiple languages such as French, Spanish, German, and others. As part of Amazon's AI strategy, the company forged a partnership with South Korean startup Upstage to integrate its compact language model, SOLAR MINI, into AWS.
Furthermore, Amazon unveiled new enhancements to Amazon Bedrock, aimed at facilitating the development of advanced generative AI applications for customers. Bedrock presently boasts an array of foundational models from AI21 Labs, Anthropic, Cohere, Meta, Mistral AI, and Stability AI. This diverse selection ensures seamless deployment, scalability, and ongoing optimization.
Despite the imminent departure of AWS CEO Adam Selipsky, who is soon to be succeeded by Matt Garman, there seems to be little cause for concern. Garman, as per his LinkedIn profile, has been an integral part of AWS since 2006 and has held top-level positions since 2013. This suggests that he has played a significant role in AWS's journey to becoming the world's largest cloud provider.
Amazon's dominant presence in both ecommerce and cloud computing not only provides strategic advantages but also exposes the company to significant antitrust risks. For instance, the U.K. Competition Market Authority aka CMA recently launched an investigation into Amazon's collaboration with Anthropic, raising concerns about potential negative impacts on competition in the UK market. Presently, it's challenging to gauge the extent of this risk, but it's improbable that the partnership will be disrupted due to antitrust scrutiny. Nevertheless, navigating through such scrutiny may result in increased legal and consulting expenses for Amazon, which were likely not anticipated.
Meanwhile, Microsoft and Google are steadily increasing their market share in the cloud industry, posing a threat to AWS's dominance. While the gap between AWS and Azure remains considerable at six percentage points, there's a noticeable trend of competitors expanding their market shares while AWS's share contracts. In the first quarter of 2023, Azure held a 23% share, and Google Cloud held a 10% share, both lower than their respective shares in the first quarter of 2024 (the latest market shares of key vendors highlighted in a screenshot for my fundamental analysis). Although these changes are not drastic, the trend underscores the intense competition that AWS is facing.
Considering various favorable advancements related to Amazon, especially its leading AWS division, I am of the opinion that the company's foundational aspects have strengthened beyond my initial assessment. According to my discounted cash flow (DCF) model, there appears to be approximately a 20% upside potential, making this investment opportunity quite compelling.
Do you take profit or ready for breakout?
Amazon pleasantly surprised most investors with its earnings report, boosting confidence in the stock. Revenue increased by 12.5% Year-Over-Year, while the adjusted earnings per share surged from $0.31 to $0.98, more than tripling. This significant improvement in profitability was attributed to robust operating leverage, resulting in expansion of both gross and operating margins compared to the previous year.
I'd like to emphasize significant top-line advancements because when revenue expands across diverse dimensions and business sectors, it indicates optimism. This demonstrates that the company isn't solely dependent on one or two primary growth factors but rather utilizes a diversified revenue mix, enhancing its ability to withstand potential external disruptions. Looking at the segments individually, Amazon experienced revenue growth in both North America (increasing by 12% YOY) and International markets (rising by 10% YOY). Additionally, Amazon Web Services , a crucial growth driver in recent years, achieved a strong 17% YOY growth, reaching $25 billion.
Revenue performance remained robust across all major business sectors. Amazon experienced growth in both its Services division (up 17% YOY) and its Product division (up 7% YOY). Furthermore, revenue from digital advertising surged by 24% year-over-year to reach $11.8 billion. Sales from physical stores, online sales, and Prime memberships also saw YOY revenue growth. This indicates a solid momentum in revenue growth across all key areas.
Looking ahead, let's delve back into the segments. Amazon commands a commanding 37.8% share of the global e-commerce market, solidifying its dominance in this sector. Its status as a pioneering e-commerce entity has provided a strong foundation, further bolstered by substantial investments in innovation. With an ecosystem boasting 310 million active users and 2 million active sellers, Amazon's position in global ecommerce appears secure. Consequently, its e-commerce segment is poised to benefit from positive long-term trends, with the global market projected to grow at a compound annual growth rate of 15.9% by 2029.
Now, let's shift focus to the company's standout performer, its cloud business. AWS maintains its dominant position in the global cloud infrastructure market, commanding a 31% market share. As competition intensifies, all major cloud service providers are deeply engaged in the race for AI supremacy, significantly ramping up investments in data center infrastructure. Amazon, in particular, has unveiled plans to allocate up to $150 billion towards expanding its data center infrastructure over the next decade, marking one of the most ambitious financial commitments seen among tech giants thus far.
Undoubtedly, investments of such magnitude carry inherent risks for any company, as there's always a chance that they may not yield the desired returns. Nevertheless, Amazon has built a reputation for the exceptional efficiency of its investments. Over the past 15 years, spanning from 2009, Amazon has poured approximately $400 billion into research and development (R&D). Remarkably, during this period, Amazon's market capitalization surged from roughly $30 billion to an astounding $1.7 trillion. This stellar track record underscores the company's adeptness at translating R&D investments into substantial value creation for its shareholders.
However, AWS's increasing investments in capital expenditures aka CapEx and research and development (R&D) are poised to bolster the growth trajectory of the company's cloud business. In addition to bolstering CapEx and internal R&D, Amazon recently augmented its investment in Anthropic by $2.75 billion. Anthropic, seen as a close competitor to the leading OpenAI, recently rolled out its Claude chatbot in Europe, offering support for multiple languages such as French, Spanish, German, and others. As part of Amazon's AI strategy, the company forged a partnership with South Korean startup Upstage to integrate its compact language model, SOLAR MINI, into AWS.
Furthermore, Amazon unveiled new enhancements to Amazon Bedrock, aimed at facilitating the development of advanced generative AI applications for customers. Bedrock presently boasts an array of foundational models from AI21 Labs, Anthropic, Cohere, Meta, Mistral AI, and Stability AI. This diverse selection ensures seamless deployment, scalability, and ongoing optimization.
Despite the imminent departure of AWS CEO Adam Selipsky, who is soon to be succeeded by Matt Garman, there seems to be little cause for concern. Garman, as per his LinkedIn profile, has been an integral part of AWS since 2006 and has held top-level positions since 2013. This suggests that he has played a significant role in AWS's journey to becoming the world's largest cloud provider.
Amazon's dominant presence in both ecommerce and cloud computing not only provides strategic advantages but also exposes the company to significant antitrust risks. For instance, the U.K. Competition Market Authority aka CMA recently launched an investigation into Amazon's collaboration with Anthropic, raising concerns about potential negative impacts on competition in the UK market. Presently, it's challenging to gauge the extent of this risk, but it's improbable that the partnership will be disrupted due to antitrust scrutiny. Nevertheless, navigating through such scrutiny may result in increased legal and consulting expenses for Amazon, which were likely not anticipated.
Meanwhile, Microsoft and Google are steadily increasing their market share in the cloud industry, posing a threat to AWS's dominance. While the gap between AWS and Azure remains considerable at six percentage points, there's a noticeable trend of competitors expanding their market shares while AWS's share contracts. In the first quarter of 2023, Azure held a 23% share, and Google Cloud held a 10% share, both lower than their respective shares in the first quarter of 2024 (the latest market shares of key vendors highlighted in a screenshot for my fundamental analysis). Although these changes are not drastic, the trend underscores the intense competition that AWS is facing.
Considering various favorable advancements related to Amazon, especially its leading AWS division, I am of the opinion that the company's foundational aspects have strengthened beyond my initial assessment. According to my discounted cash flow (DCF) model, there appears to be approximately a 20% upside potential, making this investment opportunity quite compelling.
Do you take profit or ready for breakout?
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