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$Amazon.com(AMZN)$ is expected to report earnings on the second of August after market close. Amazon is one of my favorite Magnificent 7 stocks. However, it is the worst-performing stock among the Magnificent 7, with a 3-year annualized return of only 2.55%. Its underperformance is mainly due to overexpansion during the COVID period.
Revenue is expected to grow 10% year-over-year in the Q224, and operating income is expected to grow 79% year-over-year.
Operating margin is expected to decline to 9.25% this quarter compared to 10.68% one quarter earlier. Interestingly, 10.68% is also the highest operating profit margin Amazon has ever achieved. Historically, Amazon would incur a lot of capital expenditures to bring down the operating margin. The main reason Amazon incurs a lot of capex is to build sustainable profit and cash flow rather than focusing on near-term profit. If Amazon CEO Andy Jassy surprises all of us by maintaining this high level of profit margin in coming quarters, then I would think Amazon stock could go up higher from here.
Key takeaways from 1Q2024 earnings:
Firstly, third-party seller services, advertising, Amazon Prime subscriptions, and AWS have all shown double-digit year-over-year growth for the past eight consecutive quarters. These are the major revenue growth drivers for Amazon, collectively accounting for 57% of the total revenue.
Secondly, third-party sales, not first-party sales, will boost revenue in the future. First-party online stores, which account for 38% of the total revenue, grew by only 7% year-over-year in the first quarter this year. In contrast, year-over-year growth for third-party sales is 16%, contributing to 24% of the total revenue, making it the second-largest segment now. Currently, about 65% of Amazon's GMV comes from third-party sales and is expected to grow to 70% by 2027.
Thirdly, the year-over-year growth for AWS is 17% in the first quarter this year, lagging behind Google Cloud's growth of 28.44% and Microsoft Azure's 31% during the same period. However, AWS's operating income year-over-year growth was quite impressive at 84%. The AWS operating margin was 37.63% in the first quarter of 2024. Most impressively, AWS currently accounts for 17% of total revenue but contributes 62% of Amazon's total operating income.
Amazon AWS is still the largest cloud player with a 31% market share, followed by Microsoft Azure at 25%. Moving forward, AWS will be the key revenue driver for Amazon because generative AI will benefit cloud players like AWS by increasing demand for computing power and storage.
The biggest downside risk for Amazon is intense e-commerce competition. To compete with these Chinese players, Amazon intends to launch an online storefront for low-priced products in the next few months. It will also ship products directly to customers from China. The US intends to close the De Minimis Tax Loophole that helps Temu and Shein keep prices so low. Thus, Chinese e-commerce players may suffer from lower profit margins in the future as they compete with Amazon.
The current Consensus 12-month Target Price for $Amazon.com(AMZN)$ is $222.61, indicating an upside potential of 15.5% relative to yesterday's closing price of $192.72. I maintain a positive outlook on Amazon, primarily driven by potential margin expansion, AI-driven growth in AWS, and the expanding e-commerce market in India.
In conclusion, the main investment thesis for $Apple(AAPL)$ is centered around the iPhone upgrade cycle. As for $Tesla Motors(TSLA)$ , I see 2024 as a transition year, with most growth expected to materialize in 2025. However, if Elon Musk continues to make ambitious promises on Twitter or during earnings calls, Tesla's stock price is likely to rise this year.
Regarding $Amazon.com(AMZN)$ , the benefits from cost optimization are tapering off. However, the growth in generative AI might arrive just in time to boost profit margins.
In summary, I believe all three of these stocks are long-term beneficiaries of AI.
All of the Magnificent Seven stocks appear quite expensive at the moment. For instance, Apple has a P/E ratio of 33.8x, Amazon is at 32.6x, and Tesla is at 94.5x. However, investors are willing to apply higher P/E ratios for AI-related stocks.
Currently, AI is poised to kickstart a new earnings growth cycle for these stocks, akin to Nvidia's experience over the past year. So, unless earnings significantly miss expectations for two to three consecutive quarters, I may start to doubt my optimism about AI. Until then, I believe the valuations of these AI stocks are justified.
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