Amazon.com Inc (AMZN) Com Stk USD0.01
HL comment (2 February 2024)
Amazon's fourth-quarter net sales rose 13% to $170.0bn, ignoring the effect of exchange rates. That includes double-digit growth in all areas, including across retail. Amazon Web Services (AWS) sales rose 13% to $24.2bn.
Significant increases in retail profitability, coupled with higher margin AWS growth, meant operating income was $13.2bn, up from $2.7bn the previous year. Overall performance was better than expected.
Free cash flow was $36.8bn on a trailing twelve-month basis, compared to an $11.6bn outflow in the prior year. There was net cash of $28.5bn as at the end of December.
Amazon announced Rufus - an AI-powered shopping assistant, which is set to "facilitate product discovery". In the new quarter, net sales are expected to be between $138.0bn - $143.5bn, or to grow between 8% and 13%. Operating profit is expected to be between $8.0bn - $12.0bn, up from $4.8bn.
The shares rose 6.3% in pre-market trading.
Amazon bears have been proved wrong, going by last quarter's numbers. Retail has rebounded in a big way as consumers loosened the purse strings over the festive season.
Margins have been resuscitated following the better revenue and gargantuan cost-saving efforts, including lay-offs. Profits have come back to life. US consumer spending's continuing to rise, meaning for now, higher interest rates aren't hampering things. But things are far from solved. The consumer environment remains uncertain and this could yet worsen, so this will be something to monitor.
But away from the instantly-recognisable cardboard parcels on doorsteps is Amazon's crowning jewel. 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 substantial 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.
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. 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 potentially coming under pressure, and a level of uncertainty in near-term cloud demand, there could be rocky times ahead.
Amazon key facts
- Forward price/earnings ratio (next 12 months): 42.7
- Ten year average forward price/earnings ratio: 111.9
- Prospective dividend yield (next 12 months): 0.0%
- Ten year average forward dividend yield: 0.0%
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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