Amazon's Q1 2024: A Profitable Day 1
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It’s very early days in all of our businesses.
Andy Jassy, Amazon’s CEO
Hi reader,
Amazon reported stellar Q1 results earlier this week, although there was something for everyone: for the bears, for the bulls, and even for the neutral (just kidding, there are no such people in the stock market!). The stock initially soared in after hours trading but ended up close to flat after the call despite Amazon pretty much reporting a blowout quarter. The reason might lie in Capex, a topic I’ll give my thoughts on in this article.
Without further ado, let’s get on with it.
The summary table and some comments
I typically share a summary table in this section with the main financial metrics, the KPIs, and the guidance. As you can see below thanks to the colour code, the quarter was outstanding quantitatively speaking, especially regarding profitability:
Some brief comments on these numbers…
I know this is evident in the numbers, but we should not underestimate that Amazon is growing its top line at a double-digit clip despite this topline being at a $570 billion run rate. The best thing of all is that the runway seems to be far from over.
This growth is more impressive than many give the company credit for, but the real highlight, as it has been over the past few months, could be found in profitability. Operating income grew 219% year over year, and operating cash flow rose almost 300%. When someone says, “Amazon is growing at 13%, so its multiple is unjustified,” don’t forget that they are cherry-picking data. Amazon’s earnings are growing significantly faster, so looking at the LTM (Last Twelve Months) multiple is extremely misleading.
The company also demonstrated excellent cost control. Not only did most cost lines grow slower than revenue, but two of them (sales and marketing and general and administrative) actually decreased year over year.
Net income grew 205% year over year despite the headwind from the investment in Rivian. Management mentioned that Rivian was a $2 billion headwind this quarter compared to a $0.5 billion headwind in the comparable quarter. Ignoring this non-cash and non-operating expense, net income would’ve grown 272% year over year.
Just like profitability, cash generation was also a highlight. Amazon’s cash flows grew strong and steady, showing Capex leverage. Capex barely grew 5% year over year, although management announced in the call that there would be a significant Capex step up in 2024 (more on this later).
This cash generation capacity and management’s commitment to pay down debt are improving the company’s financial position significantly. It’s funny because when Amazon was at $80, some people in a public article I released on Amazon commented that the company could potentially go bankrupt. Well…this quarter, Amazon generated more in interest income than it paid in interest expense. Understanding when “wounds” are self-inflected and when they are a consequence of a lousy business model is essential, and Amazon is an excellent example of why.
AWS was another highlight. Growth accelerated, and margins skyrocketed. This said, part of the margin uplift came from Amazon's change in server life a couple of quarters ago. This change is purely accounting-based, so it’s not like profitability got better from one day to another; cash profitability should’ve remained constant (and it’s what matters).
Finally, something that has been the case for the past few years: Amazon continued its transition to a service business. Service business lines continued to outpace Amazon’s 1P operations in what is strikingly obvious by now a conscious choice by management. In 2019, service made 43% of Amazon’s total revenue; this quarter, 57.5%.
The only lowlight in the numbers was the dilution. Amazon’s outstanding shares grew 3% year over year, which is significant but not worrying considering where FCF is headed.
Some people pointed out guidance as another worrying sign because the company missed analyst estimates. We should not forget that Amazon tends to be very conservative with guidance, especially regarding operating income. Proof of this can be found in what they guided to last quarter and what they reported.
Qualitative highlights and lowlights
Retail operations
Amazon’s retail operations continued to get faster and cheaper, meaning many customers increasingly spend more money with the company (as I mentioned in my last NOTW): “Nearly 60% of Prime members orders arrived the same or next day. Globally, in cities like Toronto, London, and Tokyo, about three out of four items were delivered the same or next day.” The best news is that management believes the runway to lower costs is still significant…”Our same-day facilities are our least expensive facilities in the network.”
Advertising was again strong despite its scale. Andy Jassy hit the nail on the head explaining why Amazon’s Prime Video Ads are advantaged against competitors: “Prime Video offers brands value as we can better link the impact of streaming TV advertising to business outcomes like product sales or subscription sign-ups.” Many also pointed out the relative weakness of Amazon Ads against competitors like Google or Meta, who say a clear acceleration in their businesses. Considering the comps both businesses faced, this is a strange conclusion to reach: Amazon Ads did not slow down post-pandemic like the others.
One thing that management mentioned, which I disagree with, is that they claim that Amazon continues to “welcome” luxury brands. Having studied the luxury sector for quite some time, I can confidently say that if a brand sells on Amazon, it’s not luxury. Luxury brands, by definition, own and control their customer experiences, something that’s not possible by selling on Amazon.
(If you want to read more about the luxury sector you can read or listen to this episode of Chit Chat Stocks where I had a conversation about luxury with
and the guys at .)Amazon Web Services
As mentioned above, AWS is accelerating primarily for two reasons: (1) customer optimization efforts are over, and (2) Artificial Intelligence. Management noted that AI-related services are already at a “multibillion-dollar revenue run rate” but expect growth to last significantly into the future. The growth acceleration and the opportunity ahead have implications for Capex, which I will discuss later.
Another interesting topic related to AWS is market share. AWS is growing the slowest out of the three clouds, leading many to believe it’s continuously losing market share. However, one should care about absolute value when calculating market shares, and Amazon continues to outpace competitors here: “We see more absolute dollar growth again quarter-over-quarter in AWS than we can see elsewhere.”
Interestingly, the earnings release included three examples of how AI might benefit the lifesciences and bioprocessing industries (to which I have exposure through my portfolio). Management shared three companies that are using AI to accelerate the drug discovery process, which should technically lead to a larger pipeline for such companies.
Other bets
Management announced important milestones towards commercializing its self-driving robotaxi called Zoox. If one holds Copart, this might ring an alarm bell, but if you want to understand why I don’t see this as worrying, you can read this article discussing the self-autonomy risk.
Capex and the title of this article
With all the recent discussion around free cash flow growth at Amazon and after the slow growth in Capex in recent quarters, I believe the following took some people by surprise:
We anticipate our overall capital expenditures to meaningfully increase year-over-year in 2024.
Before sharing my thoughts, let’s understand where this Capex will be spent:
Primarily driven by higher infrastructure Capex to support growth in AWS, including generative AI.
Does this bust the Amazon thesis? The answer is: “it depends.” It depends on one’s investment horizon. I invest in companies where I can trust management to allocate capital. That’s their job, and as an individual investor, I acknowledge that I will have little influence over their decisions. If they believe spending Capex on AWS will yield good returns, then so be it. Of course, this is not blind trust. I believe the runway for AWS and AI is long, and there’s a track record to look at to understand management’s ability to allocate capital.
This has led many to believe that Amazon is back to its old roots of being a cyclical company that goes from a Capex cycle to a profitability cycle and so forth. This is fair, although management argued that “this time will be different” (famous last words) as Amazon will be able to balance investments and profitability, unlike in the past:
We are in a position to do both (invest and be profitable) is the short answer.
It seems as if Amazon is “playing” with the market, first showing what the business is capable of and then starting to reinvest, thereby deferring its true potential to the out years. As a long-term investor, I am fine with this. Still, I perfectly acknowledge that shorter-term oriented investors or speculators might be having a bad time understanding this decision (this might explain the AHs market reaction for the company).
How I see it is that it’s still Day 1 at Amazon, but a profitable Day 1. The true potential earnings capacity (at steady state) has been deferred once again, but in favor of faster growth down the line. I am all up for it.
It’s also worth noting that this capacity expansion is not done blindly:
We are seeing strong demand signals from our customers and longer deals and larger commitments, many with generative AI components. So those signals are giving us confidence in our expansion of capital in this area.
Conclusion
All in all, it was an outstanding quarter from Amazon. Yes, management words might indicate we are going into yet another investment cycle, but that’s what one would like to see as a long term investor so long they trust the forward returns.
In the meantime, keep growing!
Thank you for sharing the write up. Whats are your thoughts on fcf margin% that amazon can achieve? Thanks again!
Thank you for sharing our interview! Great write-up