Amazon Posted Blowout Profits in Q2 2023 as Cost Cuts are Working
Profit Surge
The retail and tech giant released overall strong result for the second quarter of the year on Thursday, which showed a boost in both top and bottom lines [1]. Net Income surged to $6.75 billion and the highest in more than a year. This constitutes further progress on the profits front, following a series of losses recently.
Operating Income more than doubled from a year ago, to $7.861 billion. The firm projects it at $5.5- $8.5 billion for the third quarter, with the top end of the range approaching the record levels of Q4 2021.
Many tech heavyweights suffered in 2022 against an unfavorable environment of rising interest rates, high inflation and supply chain disruptions, following the pandemic boom. Amazon.com was no exception, but CEO Andy Jassy has been trying to reduce costs. These measures included 27,000 layoffs since last fall and headcount fell 4% in Q2 compared to a year ago. [2], [3]
Today's profitability metrics show that the efforts to rationalize costs and expenses are working.
Double-Digits Revenue Growth
The top line results were also impressive, with Revenues rising to $134.383 billion. Revenue increases have been lackluster for most of the recent quarters, but the firm now returned to double-digit growth (11% y/y).
What's more, the retail behemoth offered upbeat guidance for the third quarter. It forecasts Revenues in the range of $138.0-$143.0 billion (growth of 9-13%), likely boosted by the July Prime Day sales. The firm touted this year's 48-hour sale as "the biggest Prime Day event ever", with more than 375 million items purchased.
Advertising and Cloud Services
The online advertising business faced significant adversities over the past several quarters, negatively impacted by high inflation, economic uncertainty and post-pandemic consumer behavior. However, these headwinds abate this year, as was evident by Meta's revenue increase and Alphabet's results.
Amazon.com had been extremely resilient during that broader rough patch and as the situation improves, it reaps the benefits. CEO Andy Jassy spoke of "strong demand for our advertising services", as segment sales rose 22% y/y in Q2, to 10.683 billion. CEO Andy Jassy spoke of "strong demand for our advertising services".
The performance of the important cloud business though, left much to be desired. Although Sales of Amazon Web Services (AWS) hit new records in excess of $22 billion, the 12% y/y rise showed that the pace of increases continues to decline. Mr Jassy said that AWS growth "stabilized", but the results create some concern.
Amazon is the undisputed cloud leader, with a market share greater than 30% in Q2, according to the Synergy Research Group. However, its share is roughly stable, whereas rivals make progress in an expanding market. Google and Microsoft had the stronger year-on-year growth numbers, according to the report. [4]
Prime Video
The tech giant has also thrown its hat in the streaming arena, where it has been able to produce hit TV shows and movies, while also getting critical acclaim. It also offers sports content, an offering that streaming pioneer Netflix lacks. Sports are also well suited for advertisement inclusion, given half-times and other factors.
The latest Nielsen report showed that Prime Video stayed in the fourth place amongst streamers in June [5]. Star-studded "Air", which explores the Nike-Michael Jordan partnership premiered on Prime Video during the reported quarter. The company has also earned 68 nominations for the September Emmy Awards ceremony.
Artificial Intelligence
Generative Artificial Intelligence (AI) has emerged as the next battlefield in the tech world, with Microsoft, Alphabet and others racing for AI supremacy. Amazon appears to be in the background, as focus so far has been on the customer application front, such as the ChatGPT chatbot.
However, the AI revolution relies on cloud computing, a market dominated by Amazon.com. During Thursday's earnings call, CEO Andy Jassy highlighted the firm's progress, noting that "every single one" of its businesses has "multiple generative AI initiatives going right now". [6]
Amazon.com seems to be adopting a different approach than its rivals, trying to facilitate companies to build and run AI tools using any large language model, instead of creating its own one. In any case, AI progress going to be critical to the firm's success and its cloud standing.
Conclusion
The retail and tech giant faced many problems last year, with its stock taking a big hit. It has been turning things around though and AMZN.us has rallied around 60% during the first seven months of the year.
Thursday's impressive results were a testament to the firm's evolution and markets reacted positively, sending the stock higher, in yesterday's extended trading. Profitability improved vastly, revenues growth returned to double-digits, ad sales continues to be strong and the firm touted AI progress.
On the other hand, its cloud segment (AWS) creates concerns with the slowing pace of revenue expansion. Furthermore, although Amazon can emerge as one of the main beneficiaries of the AI boom, the way it goes about is not as clear-cut as that of rivals.
Nikos Tzabouras
Senior Financial Editorial Writer
Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.
With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.
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