Amazon.com Inc. (AMZN, Financial) is the market leader in e-commerce with approximately 38% of U.S retail sales taking place on the platform, according to data from Statista. Despite its dominant position, the company faced major headwinds in 2022 as demand slowed and logistics costs rose. However, there was a major rebound in the second quarter as the business reported a beat on both top and bottom line expectations.
Further, the stock has risen around 54% year to date. As such, in this discussion, I will break down its earnings and determine if Amazon is truly making a comeback.
Blowout earnings
Amazon reported strong financial results for the second quarter of 2023. Its revenue of $134.38 billion beat analyst forecasts by $3.04 billion and increased by 10.87% year over year.
North America contributed to the majority of revenue with $76.9 billion reported, up 11% year over year. International sales were much slower with a 1% year-over-year increase to $29.1 billion. However, on a constant currency basis, this growth was a solid 9%.
Developments
Amazon continued to focus on its core promise of providing a huge selection of products at low prices.
The business launched online stores with a range of brands from Rent the Runway to Harlem Fashion Row and many more. Fashion is one of the few categories that still has relatively low online penetration, so it makes sense the company is pushing into this area.
Amazon reported a solid 50% increase in its customers that used same-day delivery to 26 million. The company's data has tracked fast delivery with customer satisfaction and thus, it has been a core value proposition since the beginning.
The company also acquired One Medical over the past year and has been rolling out its discounted annual membership program at just $12 per month. The U.S health care market is expected to be worth $665 billion by 2028, according to Insider Intelligence data. Therefore, Amazon has a huge opportunity to grow in this sector.
Amazon Prime Video launched its first-ever Black Friday style offer with the NFL. This is meant to entice football fans to sign up for its service.
Further, the company acquired MGM for a staggering $8.5 billion last year. During the quarter, the company benefited from the premiere of "Creed III," which grossed a whopping $100.4 million in its opening weekend and $250 million year to date.
Amazon’s advertising business is fast eating into the market share of leaders Alphabet's (GOOG, Financial) Google and Meta (META, Financial). In the second quarter, Amazon advertising reported a 22% year-over-year increase in revenue and scored an advertising partnership with social media network Pinterest (PINS, Financial).
AWS and AI
Amazon Web Services is the market leader in the cloud. The segment continued to grow, with sales increasing 16% year over year to $21.4 billion.
This was driven by a strong customer pipeline and Amazon’s strategy of helping its customers to optimize costs and save money, as opposed to encouraging spending. This may be a risky tactic in the short term, but long term this will likely build greater trust with customers and boost retention.
Amazon also launched a second AWS Region in Australia and announced plans to open another in Malaysia, giving the company even more global coverage.
AWS currently offers compute, storage, networking, databases and machine learning solutions. In order to vertically integrate its technology, the company even created its own chips, called the “Graviton,” which are now used by over 50,000 customers.
Artificial intelligence is an industry with huge growth potential and could act as a catalyst for AWS. Many people believe Amazon is behind with AI, compared to Microsoft (MSFT, Financial) (after its investment into Open AI) and Google (the creator of the transformer model concept).
However, Amazon CEO Andy Jassy said during the second-quarter earnings call that it has used AI since “day one” and it is the “absolute heart of every customer experience” the business offers.
Further, Amazon has even been creating its own chips for training AI models, called Trainium, in addition to its inference called “Inferentia.” The company’s goal is to be able to fulfill its own AI hunger, while also offering a market alternative to Nvidia (NVDA, Financial).
In the meantime, AWS currently offers Nvidia’s latest H100 GPUs to its customers, so they are really getting the best of both worlds.
Amazon launched Bedrock in April. This is a fully managed service that gives companies access to AI models via a simple API interface. It also offers access to its own gigantic large language model called “Titan,” in addition to other models by Stability AI, Anthropic and many more.
So far, Amazon’s Bedrock service is being used by Bridgewater Associates (Ray Dalio (Trades, Portfolio)’s hedge fund), Lonely Planet, agency giant Omnicom (OMC, Financial) and 3M (MMM, Financial).
Profitability and balance sheet
Amazon reported strong profitability in the second quarter with $4.8 billion, up 10.8% year over year. Earnings per share came in at 65 cents, which beat analyst forecasts by 31 cents.
These were positive results given the operating income included a $500 million charge related to severance. Its North America segment also reported a boost from a loss of $1.6 billion a year ago to a gain of $900 million.
Net income was $3.2 billion, a substantial improvement from the $3.8 billion loss in the prior-year quarter. This also included a $500 million non-operating loss related to a devaluation of its Rivian (RIVN, Financial) investment. A positive is this loss has narrowed substantially from an eye-watering $7.6 billion reported in the prior year.
Valuation
Amazon trades with a price-sales ratio of 2.56, which is below its five-year average.
The GF Value LIne also indicates the stock trades at a fair value of $184 per share based on its historical ratios, past financial performance and analysts' future earnings projections. Thus, the stock is modestly undervalued at the time of writing.
Final thoughts
Amazon is an incredible company that is truly dominant in the world of e-commerce and the cloud. The company has faced immense challenges over the past year due to rising supply chain costs and lower demand. However, despite those factors and the forecasted recession, it looks as though the tide may be turning.
