On Thursday, October 31, the technology giant which vigorously promotes e-commerce and cloud computing services globally, while actively participating in the "AI arms race" $Amazon (AMZN.US)$ released the financial report for the third quarter of 2024, concluding the financial reporting season for the "Magnificent 7" of US technology companies, except for Nvidia, together with Apple.

Due to Amazon's third-quarter revenue exceeding expectations, profits far exceeding expectations, AWS and advertising revenues basically meeting expectations, and the cloud business showing an accelerating trend in year-on-year revenue growth rate, the median of the guidance range for fourth-quarter operating profit is higher than the market forecast, causing the stock to rise nearly 6% after hours.

The company stated that it is expected to have a capital expenditure of $75 billion in 2024, an increase of approximately 55% from $48.4 billion in 2023, with capital expenditure being driven by the AWS cloud department, and capital expenditure in 2025 may be even higher.

1) Main financial data

Revenue: Net sales in the third quarter increased by 11% year-on-year to $158.9 billion, surpassing the market's expected $157.29 billion. It marks the fifth consecutive quarter of achieving lower double-digit percentage growth, slightly slower than the 12.6% growth rate in the same period last year.

EPS: Diluted earnings per share (EPS) for the third quarter was $1.43, a 52% year-on-year increase, well above the market's expected $1.14, although it had a nearly 94% year-on-year increase in the second quarter and a whopping 216% in the first quarter.

Operating Profit: The third quarter saw a year-on-year increase of over 55% to $17.4 billion, exceeding the market's expected $14.75 billion and the company's guidance upper range of $15 billion, despite a 91% year-on-year increase in the second quarter and a 219% increase in the first quarter.

Operating Margin: Approximately 11% in the third quarter, up 3.2 percentage points year-on-year, surpassing the market's expected 9.34%, with the second quarter at 9.9%.

2) Segment Business Revenue

AWS Cloud Business: Third-quarter net sales increased by 19% year-on-year to $27.45 billion, slightly lower than the market's expected $27.49 billion or 19.2% growth, but essentially in line with the previous quarter's growth, surpassing the nearly 17% year-on-year increase in the first quarter and the 12% increase in the same quarter last year.

Some netizens claim that Amazon AWS has brought in over $100 billion in revenue over the past 12 months for the first time in history.

Advertising: Net sales in the third quarter increased by 19% to $14.3 billion, in line with market expectations, with growth outpacing the company's core retail business. This growth was essentially consistent with the 19.5% growth in the second quarter, but cooled down from the approximately 24% year-on-year increase in the first quarter.

3) Performance Guidance

Revenue: It is expected that the net sales in the fourth quarter will be in the range of $181.5 billion to $188.5 billion, equivalent to a year-on-year increase of 7% to 11%. The midpoint of the range, $1850 billion, is lower than analysts' expectations of $186.36 billion, marking the fourth consecutive quarter of revenue guidance below expectations.

Some analysts also mentioned that Amazon's official guidance is expected to represent the slowest revenue growth since December 2022.

Operating Profit: It is expected that the operating profit in the fourth quarter will be between $16 billion and $20 billion, higher than the $13.2 billion in the same period last year. The midpoint of the range, $18 billion, is higher than analysts' expectations of $17.49 billion.

AWS achieved a record high profit margin in Q3, with a significant increase in profit margin in the international market, leading to the company's overall operating margin reaching an all-time high.

After Jeff Bezos, the President and CEO of Amazon, Andy Jassy, announced in the financial report that more than 100 new cloud infrastructure and AI features will be shared at the AWS re:Invent event after Thanksgiving in the USA, stating:

"We kicked off the holiday shopping season with the largest-ever Prime Big Deal Days event, introducing the all-new Kindle reader, which has outperformed the company's expectations. More surprises are in store, including millions of e-commerce transactions, live streaming 'Black Friday' NFL games, and talk shows on Election Day in the USA on Prime Video."

Financial blog Zerohedge discovered that Amazon's overall operating margin rose to 11%, surpassing the record of 10.7% in the first quarter of the year, reaching a historic high. The guidance for the fourth quarter of this year, the holiday shopping season, was strong, boosting the stock price after hours.

In particular, the operating margin of the AWS cloud business increased from 35.5% to 38.1%, setting a historical high for the department. AWS's Q3 operating profit of $10.4 billion also exceeded analysts' expectations of $9.12 billion. At the same time, the profit in Amazon's international markets surged to 3.63%, reaching the highest level since the COVID-19 pandemic, contributing to the overall record high operating margin.

Amazon's third-quarter other performance indicators include:

Net sales of online stores were $61.41 billion, a year-on-year increase of 7.2%, exceeding the expected $59.64 billion;

Net sales of offline physical stores were $5.23 billion, a year-on-year increase of 5.4%, exceeding the expected $5.17 billion;

Net subscription service sales were $11.28 billion, a year-on-year increase of 11%, exceeding the expected $11.17 billion;

Net sales in the North American market were $95.54 billion, up 8.7% year-on-year, exceeding the expected $95.22 billion; operating margin was 5.9%, higher than the same period last year, also exceeding the expected 5.6%;

Net sales in the international market were $35.89 billion, up 12% year-on-year, exceeding the expected $34.55 billion; operating margin was 3.6%, higher than the same period last year, and far exceeded the expected 1.2%;

However, the net sales of services for third-party sellers were $37.86 billion, a 10% increase year-on-year, below the expected $38.22 billion.

How does Wall Street view this? They focus on AWS and advertising revenue, while also worrying about the slowdown in retail profit margins and other profit erosion from investments.

Although Amazon fell by 3.4% to a one-week low on Thursday, it has risen more than 22% since the beginning of this year, outperforming the S&P 500 index and the Nasdaq by about 20% over the same period, with the Dow being up nearly 11% where it is a component stock.

Some analysts have pointed out that despite uncertainties in the health of consumer spending facing Amazon's core retail business, Wall Street still generally looks favorably on the stock, especially appreciating CEO Andy Jassy's cost-cutting measures.

Mainstream brokerages like JPMorgan and Stifel have Amazon listed as a top pick. Out of 48 analysts, 46 recommend buying, 2 recommend holding, with no one recommending selling, and the target price of $224 represents an additional increase of about 16%.

Amazon warned its executives in August during its second-quarter earnings report that sales in the third quarter may be impacted due to the abundant amount of U.S. and international news, as shoppers' attention is diverted by events such as the Paris Summer Olympics and the Trump assassination attempt.

CEO Jassy has consistently emphasized the company's efforts to accelerate the growth of AWS, stating, "As enterprises continue to modernize their infrastructure and migrate to the cloud, while leveraging new opportunities in generative AI, AWS will remain customers' first choice."

From 2022 to this year, Amazon has launched its largest ever layoff plan in company history, with a reduction of over 27,000 employees. In comparison to founder Bezos, current CEO Jassy holds a tougher stance on high-cost yet unproven business positions. Amazon has continued to restructure its teams this year, last week announcing a halt to the Amazon Today rapid delivery service and a small amount of layoffs.

Zerohedge, however, points out that fulfillment costs for e-commerce in the third quarter grew by 11% to $24.66 billion, exceeding the market's expected $24.35 billion, suggesting that "there could be more cost optimization measures to take in the future." Some analysts also note that investors are most concerned about Amazon's advertising and cloud platform strength, but also worry that slowing retail profit margins and increased investments in other areas may erode profits.

Among major investment banks, Goldman Sachs, Evercore, Wedbush, Bank of America, and JPMorgan all have a positive outlook on AWS's accelerated expansion driven by AI. Advertising and AWS can both be high-margin businesses, making Amazon a bullish prospect in the short and long term.

However, Wells Fargo & Co rare downgraded its rating to "hold" ahead of the financial report, giving the street the lowest target price of $183. The main concern is that the recent expansion of the profit margin of the North American retail business in recent years may not be linearly upward, and rapid growth in digital advertising and logistics will also face pressure, especially Amazon's pricing power may be restricted by Walmart's competition in the e-commerce sector.

In addition, Wall Street is eager to hear the latest plans for Amazon to share Project Kuiper's satellite internet service. Although Amazon claims to invest $10 billion, third-party analysts are concerned that it may need to double its investment. Oppenheimer analyst pointed out that this plan, which competes with Musk's SpaceX Starlink, remains a huge long-term revenue opportunity, with a target audience of over 1 billion people.

Editor/Somer