Amazon‘s (AMZN 0.29%) stock rose 7% on Oct. 27 after the e-commerce and cloud leader posted its third-quarter report. Its revenue rose 13% year over year to $143.1 billion and topped analysts’ estimates by $1.5 billion. Its net income more than tripled to $9.9 billion, or $0.94 per share, and cleared the consensus forecast by $0.34.
Amazon is still growing, but is it the right stock to buy as macro headwinds continue to curb the growth of the e-commerce and cloud markets? Let’s review its growth rates and valuations to decide.
Amazon’s three core businesses are stabilizing
During the third quarter, Amazon generated 61% of its revenue from its North American unit, 22% from its international unit, and 16% from Amazon Web Services (AWS), the largest cloud infrastructure platform in the world. All three businesses struggled last year. Inflation curbed consumer spending on its e-commerce platforms while rising rates and other macro headwinds drove many companies to rein in their spending on its cloud-based services.
However, over the past three quarters, Amazon’s North American and AWS segments stabilized as the growth of its international unit accelerated again. As a result, its total revenue growth accelerated for two consecutive quarters.
North America Sales Growth (YOY)
International Sales Growth (YOY)
AWS Sales Growth (YOY)
Total Sales Growth (YOY)
During the third-quarter conference call, Amazon CFO Brian Olsavsky attributed its stable North American sales to its “biggest Prime Day event ever,” regional logistics upgrades, a growing mix of third-party sellers, and the ongoing expansion of its integrated advertising business. Olsavsky said all those improvements largely offset the “lower spending on discretionary items” from its “cautious” and price-conscious consumers.
Amazon’s international business, which experienced an acceleration as the macro situation improved and the currency headwinds waned, continued to expand beyond its core markets of the U.K., Germany, Japan, and France. During the call, CEO Andy Jassy said its emerging international stores were still growing “on a strong trajectory.”
As for AWS, the cloud platform’s growth stabilized as it picked up more clients and rolled out new generative AI features. Olsavsky noted that even though many companies were still optimizing their cloud spending in this challenging macro environment, those optimization rates were slowing down as more companies continued to “shift their focus toward driving innovation and bringing new workloads to the cloud.”
However, AWS is still growing slower than its closest competitor, Microsoft‘s Azure. Azure’s revenue rose 29% year over year in its latest quarter and accelerated from its 26% growth in the previous quarter. Azure is still a lot smaller than AWS, but its accelerating growth strongly implies that Microsoft’s big investments in OpenAI — the creator of ChatGPT — are paying off as it deeply integrates its AI tools into its cloud-based services.
Amazon’s operating margins are expanding
As Amazon’s sales growth stabilized in the third quarter, its operating margin rose 580 basis points year over year and grew 210 basis points sequentially to 7.8%. That expansion was driven by its rising North American operating margins, which bottomed out in the first quarter of 2022 as its higher-margin advertising business expanded, narrower operating losses at its international business, which are approaching breakeven levels as economies of scale kick in, and an expansion of AWS’ operating margins, which was mainly driven by thousands of layoffs.
That stabilization implies Amazon is focused on expanding the margins of its lower-margin non-cloud businesses on its own — instead of constantly relying on AWS’ higher-margin revenue to subsidize its loss-leading strategies.
For the fourth quarter, Amazon expects its operating margin to expand 370 basis points year over year to a midpoint of 5.5%. That would represent a sequential decline from the third quarter, but Amazon’s operating margins usually dip during the holiday quarter as its e-commerce platforms ramp up their promotions and deliveries.
But is it the right time to buy Amazon’s stock?
Analysts expect Amazon’s revenue to rise 5% in 2023 and 12% in 2024. The company’s withering investment in the electric vehicle (EV) maker Rivian Automotive caused it to post a steep net loss in 2022, but analysts expect it to return to profitability in 2023 and grow its earnings by 44% in 2024.
Amazon’s stock looks reasonably valued at 39 times forward earnings, and it seems to be gradually overcoming its biggest challenges. It might not revisit its all-time highs anytime soon, but it could still have plenty of upside potential in this challenging market.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Leo Sun has positions in Amazon. The Motley Fool has positions in and recommends Amazon and Microsoft. The Motley Fool has a disclosure policy.