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Amazon - cloud growth slowing

Amazon's net sales rose 11% to $127.4bn in the first quarter, ignoring the effect of exchange rates.

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Amazon's net sales rose 11% to $127.4bn in the first quarter, ignoring the effect of exchange rates. That was better than expected, and reflected growth across the North American retail business and the cloud division, Amazon Web Services (AWS). AWS revenue was up 16%, although this was lower than the 20% growth seen last quarter. The group cautioned it expects AWS growth to slow in the current quarter as companies trim tech spending. There was a 23% increase in advertising services revenue to $9.5bn.

Operating profit of $4.8bn was up from $3.7bn at the same time last year. Growth was mainly driven by AWS, with the International retail business posting a loss of $1.2bn.

There was a free cash outflow of $3.3bn on a 12 month basis, which was much narrower than the $18.6bn seen at the end of March 2022. There was net debt of $2.7bn as at the end of the period, down from a net cash position of $2.9bn three months prior.

Amazon expects net sales to be $127bn - $133bn in the current quarter.

The shares fell 2.1% in after-hours trading.

View the latest Amazon share price and how to deal

Our view

Attention has long been on Amazon's cloud business. The market's been left slightly spooked at comments that cloud revenue is set to slow as companies rein in tech spending amid uncertain economic conditions.

Despite the slowdown, a 16% increase in growth last quarter is hardly to be sniffed at. AWS's broad shoulders are carrying the group's profit line. Ultimately, this is a sturdy area of the business, helping to support Amazon while its International retail struggles. Very few businesses can afford a seat at the cloud table, and we view AWS as being in a strong position on this front compared to some peers. While we think there could be knocks to companies' willingness to splash the cash on AWS products for now, we remain optimistic about the future.

We're also supportive of growth in services, like Prime, and the group's advertising arm. It's been impressive to see the latter making progress. Troves of data footprints and millions of customers ready and willing to click buy are a marketer's dream.

All these areas are long-term growth areas in our opinion, especially with the added potential brought on by advances in AI. But that doesn't stop the near-term being tough.

The retail business is struggling, following a huge boom in demand during the pandemic years. That means margins have buckled. Amazon is still very much a retail company, so there will be a lid on how far progress can go until this is righted. The other area to keep in mind is labour costs. Even though Amazon is shrinking the workforce, it often finds itself embroiled in workers' - rights disputes. This could lead to more frequent pay increases for its staff, which adds extra pressure to profits as well as attention from socially-minded investors.

The trove of challenges from a weaker consumer to costs running high have weighed on sentiment. That's kept the valuation, on a price to earnings basis, well below the longer-term average.

That said, the group still trades at over 60 times expected earnings. We think that's largely a reflection of the prospects for AWS, and there's no denying that, plus other services areas, have huge growth potential. But with the e-commerce arm under serious pressure, and a level of uncertainty in near-term cloud demand, there could be rocky times ahead.

Amazon key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 28th April 2023