Amazon.com Inc: Robust Performance and Promising Outlook

Broker: OCBC Investment Research

Date: 4 November 2024

Introduction

Amazon.com Inc, the e-commerce giant, has reported a stellar third quarter in 2024, showcasing significant growth across its key segments. This article delves deep into Amazon’s financial performance, segment analysis, and future outlook, providing a comprehensive overview for potential investors.

Impressive Financial Performance

Amazon’s third-quarter results for 2024 have exceeded expectations, with an overall revenue increase of 11% year-on-year (YoY), reaching approximately USD 158.9 billion. Operating income grew by a remarkable 56% YoY to approximately USD 17.4 billion, marking its highest quarterly operating income ever, and surpassing the high end of the guidance range by USD 2.4 billion. Earnings per share (EPS) saw a significant jump to USD 1.43, up by 52% YoY.

Segment Analysis

North America

The North America segment generated revenue of approximately USD 95.5 billion, a 9% increase YoY. Operating income for this segment was approximately USD 5.7 billion, showing a 31% growth YoY. This strong performance underscores Amazon’s dominance in the domestic market.

International

Amazon’s International segment reported revenue of approximately USD 35.9 billion, a 12% increase YoY. The segment has also achieved a significant turnaround, generating an operating income of approximately USD 1.3 billion, with an operating margin of 3.6%, up by 390 basis points YoY. Year-to-date, the International segment has managed to generate positive operating profits totaling approximately USD 2.5 billion, a notable improvement from previous years’ operating losses.

Amazon Web Services (AWS)

AWS continues to be a key growth driver for Amazon, with revenue of approximately USD 27.5 billion, a 19% increase YoY. The segment’s operating income was approximately USD 10.4 billion, also up by 19% YoY. AWS’s operating profit margin stood at 38%, an increase of 780 basis points YoY, making it the largest operating profit contributor at 60%. The AWS AI business continues to grow at a triple-digit YoY percentage, outpacing AWS’s growth at a similar stage of its development.

Investment Thesis

Amazon holds a leading position in the e-commerce industry, leveraging its unmatched scale, strong branding, and technological capabilities. The company’s diverse operations include manufacturing and selling electronic devices, developing media content, and offering a wide range of on-demand technology services through AWS. Amazon’s commitment to innovation and customer satisfaction positions it well for sustained growth.

Encouraging Trajectory Ahead

Amazon remains focused on enhancing cost efficiency and delivery times. Recent changes to its US inbound network and the opening of additional inbound buildings, along with the rollout of same-day delivery facilities and innovations in robotics, are expected to drive further growth. Capital expenditure is projected to remain substantial, with management guiding for approximately USD 75 billion in 2024, primarily to support the growing demand for AWS and AI services. The 2025 capital expenditure levels are expected to be higher than those in 2024.

ESG Updates

Amazon’s ESG rating was downgraded in August 2023 due to high exposure to risks related to supply chain labor standards. Despite having a code of conduct for supplier compliance, audits appear to be limited to tier 1 suppliers. Additionally, Amazon’s corporate governance practices are average compared to global peers. However, Amazon leads in greenhouse gas (GHG) emission reduction efforts, conducting carbon footprint assessments and implementing energy-efficiency measures in its logistics network and stores.

Potential Catalysts

• Better-than-expected revenue and profitability growth in the AWS segment
• Leveraging its network to capture a larger share of the global ad market
• Better-than-expected margin expansion

Investment Risks

• Lower-than-expected margin expansion due to increased capital expenditure
• Intense competition in the e-commerce or cloud industry
• Uncertainties in the macroeconomic environment

Valuation Analysis

Amazon’s valuation metrics for FY24E and FY25E indicate a promising outlook. The company’s price-to-earnings (P/E) ratio is projected to be 39.7 for FY24E and 33.0 for FY25E. The price-to-book (P/B) ratio is estimated at 7.4 for FY24E and 5.8 for FY25E. Amazon’s enterprise value to EBITDA (EV/EBITDA) ratio stands at 14.7 for FY24E and 12.7 for FY25E. Although Amazon does not offer a dividend yield, its return on equity (ROE) is projected to be 22.3% for FY24E and 20.7% for FY25E.

Conclusion

Amazon.com Inc’s strong financial performance, robust growth across key segments, and promising future outlook make it a compelling investment opportunity. The company’s focus on innovation, cost efficiency, and customer satisfaction, combined with its leading position in the e-commerce and cloud industries, positions it well for sustained growth. Despite certain ESG challenges and investment risks, Amazon’s potential catalysts and valuation metrics indicate a favorable investment landscape.