Amazon's Q2 Earnings Top Forecasts, But Softer Q3 Guidance Sends Shares Down 8%

On November 19, 2024, Daniel P. Huttenlocher, a director at Amazon (NASDAQ:AMZN), sold 1,237 shares of the company's Common Stock at $199.06 per share. This transaction leaves him with 24,912 shares. Amazon, a global e-commerce and technology leader, faces competition from companies like Walmart and Alibaba. Despite challenges, Amazon remains a dominant force in the market.

Amazon is currently facing hurdles in enhancing Alexa with advanced AI features. The company has experienced delays in launching the new AI-powered version due to integration complexities with partners like Uber and Ticketmaster. These challenges highlight the intricate nature of developing cutting-edge technology, which is crucial for maintaining Amazon's competitive edge.

Despite these challenges, Amazon has announced it will not increase its merchant fulfillment and referral fees in 2025. As highlighted by PYMNTS, this decision comes despite inflation and significant investments in employee pay and benefits. Amazon attributes this to cost reductions achieved through innovation, efficiency, and defect reduction, benefiting sellers on its platform.

In addition to its e-commerce operations, Amazon is involved in innovative projects like SENSICALMATCH.AI™, a collaboration with Common Sense Networks and Deloitte. This platform, powered by Amazon Web Services (AWS), aims to enhance safe advertising for children. This initiative underscores Amazon's commitment to leveraging technology for safety and innovation.

Amazon's stock price is currently $204.61, reflecting a 1.44% increase. The stock has traded between $198.80 and $205.30 today, with a market capitalization of approximately $2.15 trillion. Over the past year, the stock has seen a high of $215.90 and a low of $141.50, with a trading volume of 30,846,395 shares on the NASDAQ.

Amazon.com (NASDAQ:AMZN) reported third-quarter earnings that exceeded analyst expectations, pushing its stock up over 7% intra-day today. The tech giant's performance was boosted by growth in artificial intelligence, particularly within its cloud division.

Amazon posted adjusted earnings per share of $1.43, beating the forecasted $1.14, and reported revenue of $158.9 billion, surpassing estimates of $157.25 billion and marking an 11% year-over-year increase.

CEO Andy Jassy highlighted "once-in-a-lifetime" opportunities emerging from generative AI, which has spurred an uptick in cloud demand as businesses ramp up investment in the necessary infrastructure. Amazon Web Services (AWS) saw a substantial lift, with sales jumping 19% to $27.5 billion. Jassy noted that AI-driven operations within AWS were experiencing "triple-digit" growth.

The surge in AI demand, however, has led Amazon to significantly boost capital expenditures on data centers and networking, with $75 billion planned for this year and even higher spending expected in 2024.

Amazon’s AI-powered shopping assistant, Rufus, expanded to additional markets, while new AI tools were rolled out for sellers and advertisers, enhancing the company’s offerings as it heads into the holiday season. North American sales rose 9% to $95.5 billion, with international sales up 12% to $35.9 billion. Amazon's operating margin reached a record 11%, with AWS margins hitting an all-time high of 38%.

For the fourth quarter, Amazon projected revenue between $181.5 billion and $188.5 billion, just below the midpoint of Wall Street analysts' $186.36 billion estimate. The company forecasted Q4 operating income between $16.0 billion and $20.0 billion.

Amazon.com (NASDAQ:AMZN) shares fell nearly 3% intra-day today after Wells Fargo analysts downgraded the company to Equal Weight from Overweight, lowering their price target to $183 from $225. The analysts pointed to several near-term pressures that could impact Amazon's operating income, including continued investment in Project Kuiper, anticipated challenges in Fulfillment by Amazon (FBA) fees, and a slowdown in advertising operating income growth.

The analysts adjusted Amazon’s operating income estimates downward by $5.4 billion, $4.5 billion, and $5.5 billion for 2025, 2026, and 2027, respectively, reflecting reductions of 7%, 5%, and 5%. They noted that while the market is bracing for fourth-quarter margin impacts, first-half 2025 margin expansion may also be limited. The analysts remain cautious until visibility around Amazon’s margin expansion improves.

They highlighted growing competition from Walmart, whose expanding fulfillment services and competitive pricing in third-party merchant logistics could limit Amazon's FBA fee growth. Wells Fargo estimates Amazon’s FBA fee inflation may see a decline of around $2 billion annually if inflation remains closer to 2024 levels. Additionally, the analysts see merchant advertising growth slowing as it has already reached 6% of gross merchandise volume (GMV) in 2024, up from 3.7% in 2020, with expectations for more modest growth going forward.

Amazon’s ad revenue may also face cost pressures from high-profile content rights, including anticipated NBA-related expenses in 2025.

JMP Securities analysts raised their price target for Amazon.com (NASDAQ:AMZN) to $265, up from $245, while maintaining a Market Outperform rating on the stock.

The analysts highlighted Amazon's robust advertising capabilities, driven by its vertically integrated, full-stack advertising platform that spans from upper to lower funnel solutions. They emphasized that Amazon's Prime membership provides unmatched data and attribution capabilities, giving it a competitive edge in the advertising space.

JMP also noted that Amazon's connected TV (CTV) advertising has lower ad loads and costs compared to competitors. The analysts project that Prime Video will generate nearly $2 billion in revenue from advertising in 2024, with potential for further growth as ad load and cost-per-thousand impressions (CPMs) increase alongside viewing hours, bolstered by live sports licensing agreements.

Additionally, the analysts believe Amazon will eventually extend its ad-tech and data capabilities to the broader web, creating new revenue opportunities within its Advertising Services business.

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NASDAQ:AMZN, commonly known as Amazon, is a global powerhouse in both e-commerce and cloud computing. The company's journey from an online bookstore to a behemoth that spans various sectors, including Amazon Web Services (AWS), artificial intelligence (AI), and more, showcases its innovative capabilities and aggressive expansion strategy. Despite facing a recent slowdown in quarterly revenue growth by about 15.68% and a decline in gross profit growth by approximately 8.69%, Amazon's financial foundation remains robust, with total revenue hitting $574 billion in 2023.

The decrease in Amazon's net income growth by roughly 1.82% might raise eyebrows among investors. However, the company's operating income growth tells a different story, with a notable increase of nearly 19.69%. This suggests that Amazon is efficiently managing its operational costs and investments, particularly in its high-margin segments like AWS, which significantly contributes to the company's operating profits. AWS's success, driven by its involvement in the AI boom, underscores Amazon's ability to innovate and capture lucrative market opportunities.

Despite the challenges reflected in the company's financial metrics, such as a significant decline in free cash flow growth by about 85.42% and a decrease in operating cash flow growth by roughly 55.28%, Amazon's strategic investments and diversified business model position it for long-term growth. The modest asset growth of approximately 0.59% and an increase in book value per share growth by about 6.94% indicate a solid underlying value in the company's assets and equity.

Moreover, Amazon's enterprise value to EBITDA valuation ratio of 19, significantly below its five-year average of 25, suggests that the stock might be undervalued. This presents a compelling opportunity for investors to consider Amazon as a potential addition to their portfolios, especially given its track record of innovation, market adaptation, and financial resilience. The company's ability to navigate market changes and capitalize on growth opportunities, as evidenced by AWS's success, reinforces its potential for future expansion and profitability.

While the recent financial performance shows mixed results, Amazon's long-term prospects remain promising. The company's diversified business model, innovative capabilities, and strategic investments in high-growth areas like AI through AWS, position it as a potentially undervalued stock that could boost investors' returns over the long term. As highlighted by The Motley Fool, patience, a diversified portfolio, and a long-term investment horizon are key when considering Amazon for wealth building, despite the current financial headwinds.