Amazon.com will release its September quarter earnings on October 31st after the market closes. According to data compiled by Bloomberg, analysts project around $157.34 billion in Q3 revenue and $1.41 in adjusted EPS, reflecting a 9.96% and 1% YoY increase, respectively.
Margin Improvement In Retail Business Could Slow Meaningfully
The original Amazon business—and still its largest—is its e-commerce and retail empire. In North America alone, revenue was $176 billion through the first six months of 2024 and grew 9% year over year last quarter. Even more important than revenue growth is profit margin expansion.
Amazon's retail segment has shown notable efficiency improvements, particularly through the regionalization strategy implemented under CEO Andy Jassy. Indeed, from Q1 2022 to Q2 2024, Amazon increased the operating margin in the North America segment from -2.3% to 5.6%, mostly as a consequence of reduced fulfillment and shipping costs.
Amazon's Retail business may not maintain a similar margin trajectory over the next few quarters, as the comparable basis is more difficult to improve upon, and persistent labor cost pressures cannot be ignored, particularly within the core retail and logistics operations.
At the same time, Amazon's reliance on low-priced essentials, alongside Prime Day and promotional events like Big Deal Days, has led to a rise in low-ASP products. While essential goods provide strong volume growth, the overall profitability is lower, which makes investors doubt that Amazon can sustain high retail margins amid a discretionary spending slowdown.
The Growth Momentum in AWS Will Likely Continue Ahead
The second important division for the company is Amazon Web Services (AWS). AWS now has an annualized revenue run rate of more than $105 billion, with second-quarter revenue of $26.28 billion growing 19% year over year, accelerating from the 17% year-over-year growth in the first quarter. A revenue growth rate of 19% is remarkable given the sheer size of AWS relative to its closest rivals, being 2-3 larger than Google Cloud.
AWS has been working on offering top-quality deployment services for some time now, for both open-source as well as closed-source models like Anthropic's Claude series. According to data from Synergy Research Group, which tracks IT and cloud data, Amazon remained the market leader among cloud providers during the June-2024 quarter with a 32% market share, followed by Microsoft at 23% and Google at 12%.
As AI is rapidly becoming integral to modern business operations, AWS is leveraging this trend to its advantage. Amazon also boasts its own line of AI chips, including 'Trainium' for training workloads, and 'Inferentia' for inferencing workloads.
The value proposition of using in-house accelerators over third-party semiconductors lies in the deeper vertical integration with AWS's servers and other infrastructure, yielding performance advancements and cost efficiencies thanks to greater control over the technology stack.
The significant cost benefits and growing demand for Amazon's in-house chips should ease the tech giant's reliance on Nvidia GPUs going forward, lowering future CapEx pressures, subsequently allowing more top-line revenue dollars to flow down to the bottom-line, improving profitability for shareholders.
In fact, AWS has already been delivering operating profit margin expansion for the past several quarters now, amid its cost control initiatives. In Q2 2024, the AWS operating margin stood at 35.5%, which is more than triple the 11% operating margin of Google Cloud.
AWS is expected to see another acceleration in revenue growth throughout the second half of 2024, supported by new workloads, increased AI monetization, and easing optimization trends. According to Bloomberg data, for Q3 2024, AWS revenue is projected to grow around 20% YoY, marking the fifth consecutive quarter of acceleration.
Amazon’s Booming Ad Business
Amazon’s advertising business is skyrocketing, showing impressive growth with more than 20% year-over-year gains for several quarters. In Q2 alone, Amazon added a substantial $2 billion to its advertising revenue, bringing the total to over $50 billion in the past 12 months.
This momentum is likely to continue in Q3, as well. Notably, sponsored ads drive the majority of Amazon’s advertising revenue, while an expansion into Prime Video ads earlier this year will set the stage for future growth. Amazon is leveraging AI to improve the relevance of ads and improving measures that allow brands to see the returns on their ad spend. Going forward, advertising on Prime Video will be an integral part of the digital ad business model, as it gives large advertisers a platform to pitch a product or service before a huge and growing audience.
By leveraging advanced advertising technology and enhanced measurement tools, Amazon is improving ad relevance for users. This not only boosts the effectiveness of the ads but also sets the stage for continued revenue growth in the future.
With its advertising segment now a key contributor to overall sales and profitability, Amazon is positioning itself as a formidable player in the digital ad space.
Other Key Metrics to Look For in Earnings Report
Investors will focus on operating margins here. Profitability has always been a sticky point with Amazon. The focus has been on growth vs. profits. In the first quarter of 2024, operating margin rose to 10.7%, thanks to CEO Andy Jassy’s cost-cutting initiatives and stronger performance of higher-margin businesses like advertising and cloud computing.
In the second quarter of 2024, operating margin was 9.9%. For the third quarter, the operating margin is expected to be between 7.3% and 9.5% based on operating income guidance of $11.5 billion to $15 billion on net sales of $154 billion to $158.5 billion.
Outlook for the fourth quarter will be a key metric to watch. Amazon typically provides net sales and operating income guidance for the sequential quarter in its earnings announcement.
Project Kuiper is Amazon’s ambitious initiative to establish a satellite internet network to provide high-speed internet to underserved and unserved regions globally by launching 3,236 satellites into low Earth orbit.
A new report from Space industry consultancy Quilty Space says the costs for Project Kuiper may be spiraling way beyond Amazon’s estimate of $10 billion to a staggering $16.5 billion to $20 billion. It remains a noteworthy figure.