[2024.4] How do we view the performance of Amazon? We should pay attention to the fundamentals, growth points, and free cash flow.

Among the major technology giants in the US stock market, only Amazon is able to hold a recognized leading position in two major industries. As a dual dominance in the e-commerce and cloud computing industries, Amazon's performance has always been the focus of attention. In terms of product structure, the operating income of 10-30 billion yuan products are 401/1288/60 million yuan, respectively.

After the US market closed on April 30th, Amazon will release their latest performance report. How should we look at Amazon's performance? What are the main points of concern? We mainly focus on three points: basic retail trade, cloud business, and free cash flow.

For basic retail trade, people's first impression of Amazon may be as an e-commerce giant. On the basis of e-commerce, Amazon has also derived offline retail businesses, third-party seller services, member subscriptions, e-commerce advertisements and other businesses, which can be classified as Amazon's basic retail trade. For retail trade, the main factors to consider are revenue growth rate and profit margin level.

For revenue, due to the impact of the pandemic and macroeconomic fluctuations, Amazon's retail trade revenue has fluctuated greatly in the past two to three years. From 2020 to the first half of 2021, the pandemic stimulated the demand for online shopping, and the loose policy of the Federal Reserve led to macroeconomic growth. As a result, the highest quarterly growth rate of Amazon's retail sector exceeded 40%.

However, starting from the second half of 2021, with the retreat of the pandemic and the decline in economic growth expectations brought about by the Fed raising interest rates, combined with the previous revenue being at a high level, the revenue growth rate of Amazon's retail trade began to decline drastically.

By the first half of 2023, the expected economic growth of the US is improving again, and combined with the low base of the previous revenue, the retail revenue of Amazon started to rebound again and returned to double-digit growth in the second quarter of this year. In the Q3 of 2023, the retail revenue growth rate of Amazon reached 12.6%, continuing the rebound trend. For the upcoming Q4 performance in 2023, we need to pay attention to whether the retail trade revenue growth rate of Amazon can continue to maintain the rebound trend.

In terms of profit margin rate, the operating profit margin rate of Amazon's retail trade business basically remained consistent with the revenue growth trend. During the first half of 2020 to 2021, the operating profit margin rate of North American retail trade business exceeded 5%, and the international retail business turned profitable. Starting from the third quarter of 2021, as the revenue growth rate began to decline sharply, the scale effect weakened, and the competition among new entrants such as TickTok and Temu intensified, the operating profit margin rate of Amazon's retail trade business decreased sharply, and even the North American business had losses.

By the first three quarters of 2023, with the expected economic growth returning to normal, and the cost-cutting measures of Amazon starting to take effect, the operating profit margin rate of Amazon's retail trade business began to rebound. The profit margin rate of North American retail trade business returned to above 5% in Q4 of 2023, and the loss of international retail business narrowed significantly.

The revenue growth and profit performance of retail trade business in each quarter of 2023 may also be an important reason for Amazon's stock price to skyrocket by more than 80% last year. For the latest financial quarter, we can continue to pay attention to whether the retail trade revenue growth rate of Amazon can maintain its rebound trend, as well as whether the profit margin rate of retail trade business can continue to improve.

2. Growth point: AWS Cloud business. Amazon has been investing heavily in cloud computing since 2006. Currently, the revenue of the AWS cloud business accounts for more than 15% of the total revenue and has become Amazon's core growth point and main source of profit. For the AWS cloud business, we mainly focus on two points.

Please refer to the previous paragraph.

First and foremost, it is about its revenue growth rate and operating profit margin. Starting from the first half of 2022, Amazon's cloud business revenue growth rate began to decline continuously due to the impact of corporate IT spending cuts, falling from quarter-on-quarter growth rate of nearly 40% to just over 10%. Its operating profit margin also fell from above 30% to about 24% in 2023Q1. However, in the Q3-Q4 of 2023, the revenue growth rate of Amazon's cloud business rebounded continuously, and the operating profit margin returned to about 30%.

For future quarters, we need to pay attention to whether the revenue growth rate of Amazon's cloud business can stabilize and whether the operating profit margin can continue to rise steadily.

Secondly, we can pay attention to the changes in Amazon's cloud business market share. Amazon is the leader in the field of cloud computing, with a market share of more than 30%. The slowdown in growth is a common phenomenon in the industry, and Amazon, as the industry leader, cannot escape it, which is also within market expectations. Although corporate IT spending has cyclical changes, the shift from traditional IT spending to cloud computing spending may be the trend, so the short-term fluctuation in the growth rate of the cloud computing industry may not change its long-term growth logic.

Under this premise, we may need to pay more attention to whether Amazon can maintain its leading position and competitive advantage in terms of market share, thereby consolidating its leading position.

We can see that among the players in the cloud computing industry with a market share of more than 10%, Microsoft Azure and Google Cloud have had similar quarterly growth rates in the past two years, and both have significantly exceeded the growth rate of Amazon AWS. This means that although Amazon's market share in the cloud computing industry temporarily maintains its leading position, its leading position may be challenged because its main competitors are moving faster. In the future, we still need to pay attention to the growth of the top-ranked industry leaders and changes in market share, and see if Amazon can reverse the situation of relatively lagging growth.

3. Long-term foundation of stock price: free cash flow.

Compared with other technology giants such as Apple, Microsoft, and Google, Amazon was in a loss-making state for a long time until it achieved large-scale profits of billions of dollars in 2018. At the same time, Amazon rarely engages in shareholder-friendly operations such as stock buybacks and dividends. However, these shortcomings do not affect Amazon's long-term rise in stock prices and its status as a trillion-dollar market cap giant. The underlying important reason may be Amazon's high growth rate and strong free cash flow in the long run.

Among them, Amazon's free cash flow may be an important factor for the market to ignore its perennial losses and its market value exceeding a trillion US dollars. Because in some valuation models commonly recognized in the market, the enterprise value is the discount of its future cash flow. In the cash flow statement of the Futubull app, we can easily see the free cash flow data for each performance period.

For example, in the ten years from 2011 to 2020, Amazon's net profit was very unstable in the early stage, but its free cash flow has always been positive and exceeded its net profit data every year. The cumulative net profit during this period is about 50 billion US dollars, but the cumulative free cash flow is close to 100 billion US dollars.

However, starting from 2021, Amazon's free cash flow situation has plummeted, and it has been negative for two consecutive years, which may also be an important reason why its stock price has significantly underperformed other technology giants in 2021 and even suffered a sharp decline in 2022.

Amazon's free cash flow has made a 180-degree turn, and an important reason behind it is the significant increase in fixed asset expenditures. Perhaps it is the influence of players such as TikTok and Temu that have intensified the industry's internal competition, or perhaps Amazon itself has felt the pressure to grow, so Amazon has increased its investment in logistics infrastructure, etc. to improve user experience and enhance its competitive advantage. Spending real money, Amazon's revenue has not continued its high growth before, but instead, its fixed asset expenditures have jumped from the previous level of tens of billions of dollars to more than 50 billion US dollars, bringing huge pressure to its free cash flow.

The good news is, Amazon's fixed asset investment has relatively decreased in 2023, and free cash flow has greatly improved, reaching a level of more than 30 billion US dollars. Therefore, for Amazon's future performance, we still need to pay attention to its fixed asset investment and the improvement of free cash flow, because this is an important foundation for Amazon's historical logic of long-term stock price rise.

Finally, to summarize,

Retail business is the foundation of Amazon, and we need to pay attention to whether revenue growth and operating profit margin can maintain an improving trend.

AWS cloud business is the core growth point and profit source of Amazon, and we need to pay attention to whether its revenue growth and profit margin can gradually stabilize.

Free cash flow is an important foundation of Amazon's long-term logic of stock price. We need to pay attention to whether its free cash flow can continue to improve in future quarters.