Welcome to HL's reimagined News, Insights and Research experience. Find out more

Share research

Amazon - margins improve on cloud and retail strength

Amazon's third quarter net sales rose 11% year-on-year, reaching $143.1bn...

No recommendation - No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Prices delayed by at least 15 minutes

Amazon's third quarter net sales rose 11% year-on-year, reaching $143.1bn and ignoring the effect of exchange rates. North America sales were up 11%, with International sales also rising 11%.

Amazon Web Services sales were up 12%, broadly as expected. Advertising saw growth of 25%.

A significant increase in North American retail and growth in AWS meant operating profit jumped from $2.5bn last year to $11.2bn. Performance was better than expected.

On a trailing twelve month basis, free cash flow was $21.4bn, compared to a $19.7bn outflow for the same period last year. The group had net cash of $3.1bn as at the end of September.

Net sales are expected to be between $160 - $167bn next quarter.

Amazon shares rose 5.5% in pre-market trading.

View the latest Amazon share price and how to deal

Our view

Amazon Web Services (AWS) is Amazon's not-so-secret weapon. Its potential is huge.

As companies increasingly harness new technologies and infrastructure, there are AWS products poised and waiting to be adopted. There are some grumblings about the likelihood of a sustained reacceleration in AWS. But Amazon bulls will argue that while AWS doesn't immediately benefit from booming demand for language-based models like those from OpenAI, it does stand to gain from other apps using things like Stability AI, the deep learning, text-to-image model.

Ultimately, we think AWS' position in the AI and cloud stack is a positive one, and the susbstantial investment announced in AWS' generative AI products speaks volumes to the expected pipeline of demand.

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.

But for all these areas, Amazon's core retail division still carries a lot of weight. And the picture here is improving. Margins buckled in recent memory as consumer spending slowed compared to the days of lockdown. But gargantuan cost saving efforts, including lay-offs, coupled with a rebound in spending, has seen profits in this part of the business start to hold their own again.

But things are far from solved. The consumer environment remains very tricky indeed and this could yet worsen, so this will be something to monitor. For now, we're cautiously optimistic the festive trading season will be strong, which could mean a bumper quarter. US consumer spending's continuing to rise, meaning for now, higher interest rates aren't hampering things.

Digging down under the hood and it's nice to see free cash flowing through the business. This helps support investment for growth.

While the valuation has come down some way from its headiest days, Amazon has still seen a substantial uplift since the start of the year. 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 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.

Latest from Share research
Weekly newsletter
Sign up for editors choice. The week's top investment stories, free in your inbox every Saturday.
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.

Our content review process
The aim of Hargreaves Lansdown's financial content review process is to ensure accuracy, clarity, and comprehensiveness of all published materials
Article history
Published: 27th October 2023