CA - Amazon: Earnings Growth Driven By Cost-Cutting Not AI Revenue Growth (Rating Downgrade)
2024-07-02 03:46:56 ET
Summary
- 82.5% of Amazon's revenue still comes from retail sales, despite a focus on the high-growth AI cloud and advertising, which has experienced a mild acceleration in growth.
- Strong earnings growth and margin expansion were driven by layoffs and marketing spending cuts, not sustainable for long-term growth.
- AWS revenue growth shows rebound, and GAAP-EBIT margin reached all-time high in 1Q FY2024, driven by the GenAI boom.
- The management expects a significant increase in capex growth YoY in FY2024, driven primarily by higher infrastructure investments aimed at supporting AWS growth.
- The stock's EV/Sales ratio is not expensive relative to its 5-year average, and its non-GAAP P/E for FY2024 is in-line with the Nasdaq 100 index.
Investment Thesis
Amazon's ( AMZN ) stock reached its all-time high last week, buoyed by its AI growth optimism. In my previous analysis , I upgraded the stock from hold to buy in August 2023, driven by a cheap valuation and potential rebound in retail sales and cost management. Since then, the stock has surged 37%, beating S&P 500 index's 21.5%. However, given the recent expansion in valuation multiples, I believe this AI hype is a bit premature. The company's primary growth driver is still its retail business. While the recent increase in capital investments in AWS infrastructures will boost its long-term growth trajectory for its cloud segment, I do not believe AWS can significantly move the needle to improve its top-line growth in the near term....
Amazon: Earnings Growth Driven By Cost-Cutting, Not AI Revenue Growth (Rating Downgrade)