Am I Sold on Amazon's Quarterly Beat? Let's Look at the Fine Print
According to the media hype, AMZN hit it out of the park. Here's my take.
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Amazon (AMZN) needed to post a solid quarter after three months of range- bound trading and being down from its January high.
And ... Amazon delivered ... Or did it?
On Thursday evening, for the the company's third quarter, Amazon posted a unadjusted earnings per share of $1.95. This easily beat Wall Street's expectations for something in the mid-$1.50s. For the quarter, the company generated revenue of $180.169 billion.
Not only was this total good for year-over-year growth of 13.4%, but that number beat consensus by almost $2.5 billion. This was the fastest pace of year-over-year sales growth for the firm since the fourth quarter of 2023. Most importantly, Amazon saw standout performance from its Amazon Web Services (AWS) segment. AWS saw sales growth of 20.2%. Now that's not the kind of growth that key competitors Microsoft (MSFT) Azure and Alphabet's (GOOGL) Google Cloud experienced, but it was the fastest pace of growth for that unit since 2022.
There had been concern that Amazon was not spending on cloud/AI computing services the way its closest competitors were and that maybe capacity could become an issue. Those issues may have been put to rest....
On AWS
- “AWS is growing at a pace we haven’t seen since 2022, re-accelerating to 20.2% YoY. We continue to see strong demand in AI and core infrastructure, and we’ve been focused on accelerating capacity – adding more than 3.8 gigawatts in the past 12 months," said CEO Andy Jassy in the press release.
- During the call, Jassy went into depth on AWS AI infrastructure building... "AgentCore's SDK has already been downloaded over 1 million times."
Jassy then added, "Trainium is being used by a small number of very large customers, but we expect to accommodate more customers starting with Trainium3."
(Project Rainier, Amazon's AI compute cluster, now includes nearly 500,000 Trainium2 chips. That number is expected to surpass 1 million by year-end.)
Operations
As revenue grew 13.4% to $180.169 billion, the cost of sales grew 10% to $88.67 billion. Total operating expenses increased 15% to $162.747 billion. That left operating income of $17.422 billion, which was very small from the year-ago comparison as operating margin dropped from 11% to 9.7%. After interest, other income & expenses and taxes, GAAP net income printed at $21.187 billion (+38.2%). For those scratching their heads, the net income number included a pre-tax gain of $9.5 billion from the company's investment in Anthropic. That number worked out to $1.95 per fully diluted share, up from $1.43.
Segment Sales Performance
- Online Stores... generated revenue of $67.407 billion (+9.8%)
- Third-Party Seller Services... generated revenue of $42.486 billion (+12.2%)
- Amazon Web Services... generated revenue of $33.006 billion (+20.2%)
- Advertising Services... generated revenue of $17.703 billion (+23.5%)
- Subscription Services... generated revenue of $12.574 billion (+11.5%)
- Physical Stores... generated revenue of $5.578 billion (+6.7%)
Geographic Performance
- North America.... generated revenue of $106.267 billion (+11%), producing operating income of $4.789 billion (-15%), on an operating margin of 4.5%, down from 5.9%.
- International... generated revenue of $40.896 billion (+14%), producing operating income of $1.199 billion (-8%), on an operating margin of 2.9%, down from 3.6%.
Fundamentals
For the period reported, Amazon generated operating cash flow of $35.525 billion. Out of that number came capital spending of $35.095 billion, leaving free cash flow of just $530 million. The company did not return capital to shareholders.
Turning to the balance sheet, Amazon ended the quarter with a cash position of $94.197 billion and inventories of $41.494 billion. That put current assets at $196.866 billion. Current liabilities add up to $195.196 billion, including $21.113 billion in unearned revenue, and no short-term debt. That leaves the firm with a headline current ratio of just 1.01. After adjusting for those unearned revenues, that ratio rises to 1.13. This ratio passes muster but is by no means a terrific number.
Total assets amount to $684.894 billion. Very little of that is in goodwill or other intangibles, which is a positive. Total assets less equity comes to $452.028 billion including long-term debt of $50.742 billion. That's something the company could easily handle out of pocket if need be. This is not a "bad" balance sheet, but it's not as good as it was a few years ago or even just last year.
My Thoughts
I started researching this article more or less fired up about the quarter Amazon had reported. I even considered chasing the stock last night after it took off. It's a good thing that I do my homework. I almost took down some equity in this name. I am far less impressed now that I have gone through it, than I was just after reading everyone else's take.
The quarterly numbers were boosted significantly by a $9.5 billion pre-tax gain on an investment. Haven't heard that in the media this morning. Free cash flow has withered. The balance sheet has degraded over time in terms of quality. Nothing said about that in the media, either. Profit margins are sinking like a rock across both the North America and international regions. Heck, margin is even dropping at the AWS segment, which is the bright spot of this report.
Operating income at AWS grew 9%, but margin dropped from 38.1% to 34.6%. Yikes. Additionally, as mentioned above, while there is great demand for cloud / AI computing services and that is lifting all boats, Microsoft and Google are both still taking share away from AWS. No, I will not buy any shares of Amazon up double-digit percentage points this morning. I'm not even giving it a second thought.
Readers will see that AMZN developed a Cup with Handle pattern from early 2025 into August. The pattern failed to create a breakout and the stock built what's called a flat basing period of consolidation over the past few months. This morning, the stock broke past the upper line of resistance for that base at $239. If you're a bull, that was you pivot.
That said, the stock created a large gap this morning that will require a tick as low as $228.44 to fill. We know that unfilled gaps don't have to fill. We also know that eventually, they usually do. The indicators are positive. Relative Strength is nearing technically overbought territory, while the daily Moving Average Convergence Divergence is about to enter bullish territory.
I honestly do not trust it. If traders have not yet taken profits in AMZN by the time this piece is published as I cannot front-run my own article, I am far more likely to initiate a short-term short position for a trade, not as an investment. Color me a lot less impressed with Amazon than I thought I would be.
At the time of publication, Guilfoyle was long GOOGL, MSFT equity.
