Amazon Ups Investment and Capex Spending, We’ll Stick Around for the Benefits

Amazon AMZN shares are poised to move lower on Friday morning despite the company’s consensus-topping December quarter results due to a few factors.

They include slower sequential growth at Amazon Web Services (AWS), the company ramping its capital spending to $105 billion in 2025 and revenue guidance for the current quarter that fell short of market expectations. Following the more than 20% move in the shares since late November, the post-earnings reaction to those forces is not out of the ordinary, especially when the Fear & Greed Index is once again flashing "Fear."

Capacity constraints at AWS that will be addressed like they are being done at Microsoft MSFT and Alphabet GOOGL, and tougher year-over-year comparisons due to 2024 being a leap year explain some of those factors. Odds are they will be overlooked by longer-term investors, but the exit of momentum traders will weigh on the shares near-term.

We are not surprised by Amazon stepping up its 2025 capex spending, in part because part of its ethos has been to invest for future growth. What we like under CEO Andy Jassy is the added focus on profits and margins that should allow Amazon to fund these investments while also delivering continued bottom-line growth.

Our thinking is that, as consumers embrace digital shopping further and the adoption of AI and cloud continues, Amazon stands to reap the benefits of capex and cost/productivity investments in 2H 2024 and 2025. We’ll be looking to see that payoff in further margin expansion at the retail-facing business and a pickup in AWS’s performance in the coming quarters. As investors, it’s that step function higher in profit growth that we want to participate in with AWS shares.

For now, as we enter Amazon’s seasonally weakest quarter of the year, we will maintain our $265 price target for AMZN shares and plan to revisit it as we move into the June quarter.

With AMZN shares poised to open lower, we’ll hold off changing our One rating for now, but if we see them move past $240, we’d be inclined to revisit it. On the flip side, should AMZN shares pull back near $225 that would be a nice pickup point, especially if they successfully test the 50-day moving average currently at $224.82.

By the Numbers: December Quarter

Amazon reported December quarter EPS of $1.86 per share, well ahead of the $1.49 consensus, on revenue that climbed 10.5% year over year to $187.79 billion, edging out the $187.31 billion consensus. Included in that top-line results was a foreign exchange drag of about $700 million that trimmed close to a half percentage point of revenue growth for the quarter. Amazon isn’t the first company to call this out given the dollar’s strength and we doubt it will be the last. Breaking down the company’s reported revenue we find growth across the board for its three main reporting segments:

North America segment sales increased 10% year over year to $115.6 billion, benefitting from holiday sales and consumer wallet share gains. By comparison, Q4 2024 retail sales reported by the Department of Commerce rose 3.8% year over year with digital shopping up 7.5%. Also helping drive share gains is the continued expansion of same-day delivery, something we see as an extremely competitive force against brick-and-mortar retail. Last year, Amazon expanded the number of same-day delivery sites by more than 60%, serving more than 140 metro areas.

Amazon’s International segment sales increased 8% to $43.4 billion. AWS segment sales climbed 18.9% year over year to $28.79 billion. On the earnings call, management rattled off a number of new AWS agreements, including ones with Intuit, PayPal, Norwegian Cruise Line Holdings, Northrop Grumman, The Guardian Life Insurance Company of America, Reddit, Japan Airlines, Baker Hughes, The Hertz Corporation, and others.

On a sequential basis, the rate of growth was more muted at just under 5% and as we learned on the earnings call, just like the cloud businesses at Microsoft and Alphabet, AWS was capacity-constrained.

Called out constraints included chips from third-party partners, a thinly veiled reference to Nvidia NVDA, and power constraints, which speaks to why we own Eaton ETN and the VanEck Uranium & Nuclear ETF NLR in the Portfolio.

Much like Microsoft and Alphabet, Amazon ramped up its capex in 2H 2024 to address this issue. During the December quarter alone, the company spent $26.3 billion, one-third of its full-year capital spending that totaled $78.2 million. On the earnings call, management indicated that the December quarter was a good run rate of capex spending for 2025, indicating Amazon would increase its capex year over year by almost 35% to $105 billion.

And it was no surprise that management shared that the vast majority of capex spend is for AI and AWS. More support for our positions in Nvidia and Marvell MRVL.

There are a few other revenue details contained in the various tables furnished in Amazon’s earnings press release that bleed across those three reporting segments but in our view are worth sharing: Online sales combined with third-party seller services rose just over 8% year over year to reach $123.4 billion, accounting for 65.7% of total revenue in the quarter. Advertising services revenue grew 8% to $17.3 billion, roughly 9% of total revenue for the quarter compared to 8.6% in Q4 2023.

As we move past the holiday shopping season, this high-margin business should become a larger piece of the revenue pie. Subscription service revenue rose 10% to $11.5 billion Impressive figures when we consider these are on top of the difficult comparisons, especially for the retail-facing business.

Amazon Continues to Deliver Margin Growth

What we like even more is the operating margin expansion to 11.3%, which is a big move compared to the 7.8% achieved in the year-ago quarter. Much like we save on the revenue line, each of the three major reporting segments delivered not only profit dollar growth compared to the December 2023 quarter, but also healthy margin expansion:

North America segment operating income was $9.3 billion (8.0% operating margin), compared with operating income of $6.5 billion (6.1%) in the year-ago quarter.

International segment operating income was $1.3 billion (3.0%), compared with an operating loss of $0.4 billion in Q4 2023.

AWS segment operating income was $10.6 billion (36.9%), compared with operating income of $7.2 billion (29.6%) in 4Q 2023.

There were several factors that led to this including cost reduction efforts and the benefits of operating leverage during the seasonally-strongest quarter of the year but also the growing influence of higher margin businesses (advertising, subscription) on the overall revenue mix.

Stepping back and looking at the overall margin progress notched in 2024 to 10.8% compared to 6.4% in 2023 and 2.4% in 2022 makes this much clearer in our view. Called out cost reduction and productivity improvements during the earnings call including the use of AI in the retail facing business, automation and robotics, and management sees further gains for those actions ahead. Even though Amazon spent $83 billion in capex during 2024, up considerably from the $52.7 billion spent in 2023, its operating cash generation climbed to $115.9 billion last year versus just under $85 billion in 2023. Our comments about 2025 capex spending above give some added perspective on the continued focus on margin expansion under CEO Andy Jassy.

Amazon’s 1Q 2025 Outlook

As we drink in those positive developments laid out above, the pressure on AMZN shares on Friday morning reflects Amazon’s outlook for the current quarter. It’s calling for revenue between $151.0 billion to $155.5 billion compared to $143.3 billion in Q1 2024 and the market consensus forecast of $158.56 billion. Quarter revenue guidance implies a steeper sequential decline compared to last year, but as we look at the calendar we see there is one less day in the March 2025 quarter given 2024 was a leap year.

That extra day in the March 2024 quarter, per Amazon, contributed approximately $1.5 billion of additional net sales across its reporting segments in the quarter. The company guided its operating income for the current quarter between $14 billion to $18 billion compared to the $15.3 billion posted in the year-ago quarter. We’ll note the recent track record of management low-balling its operating profit guidance but share the math on that outlook implies an operating margin range of 9.0% to 11.9% for the current quarter versus 8.4% in the March 2024 quarter.

Connecting Dots to Marvell and Trade Desk

During its earnings call, Amazon made a few comments that bring some additional color to our positions in Marvell and Trade Desk TTD.

With Marvell, those comments were about Amazon’s proprietary AI Trainium chips, including how Antropic is using Tranium2 to build its Project Rainier which will use “hundreds of thousands of Trainium2 chips.”

Amazon also tipped it is working on Trainium3, which should be previewed late this year, as well as Trainium4. That lays the groundwork for Marvell to talk favorably about its proprietary AI chip business when it reports its quarterly results.

Turning to Trade Desk, Amazon’s continued progress in streaming and the growth it is achieving in digital advertising reaffirms and supports the structural shift we aim to capture with TTD shares.

That, along with other comments from advertising agencies and quarterly results from Netflix NFLX, sets the stage for a favorable earnings report from Trade Desk on February 12. We’d remind you that when Trade Desk serves up its guidance the sequential comparisons will be impacted by the rolloff of 2024 presidential ad spend. Recognizing that, we would rather take advantage of a post-earnings pullback than be a buyer into the upcoming earnings report.

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At the time of publication, TheStreet Pro Portfolio was long AMZN, MSFT, GOOGL, NVDA, ETN, NLR, MRVL and TTD.