Amazon’s Earnings Preview: Analysts Bullish on Retail, AWS and AI, but Concerns Linger
Goldman Sachs and RBC Capital analysts have reiterated their bullish stances on Amazon.com Inc. (AMZN) ahead of the company’s upcoming second-quarter earnings report. Both analysts see potential for continued growth in Amazon’s eCommerce business, AWS, and advertising, driven by strong consumer demand, margin expansion, and the increasing adoption of AI. However, concerns remain about the company’s competition in the cloud computing space and the impact of its shift from Nvidia’s GPUs to its own custom chips.
Key Takeaways:
- Strong Ecommerce Performance: Analysts believe Amazon’s eCommerce business remained robust in the second quarter.
- Operating Margin Upside: Analysts expect the company to continue delivering operating margin upside, driven by improvements in efficiency, lower costs, and strong growth in high-margin businesses like advertising.
- AWS Reacceleration: Despite competition, AWS is expected to see a reacceleration in revenue growth driven by increased adoption of cloud services, optimization of workloads, and the growing trend of AI workloads.
- Continued Retail Margin Expansion: Retail margins are expected to continue expanding due to operating leverage, cost reduction initiatives, and moderate inflation.
- AI and Chip Transition: While Amazon’s shift to its own AI chips may impact Nvidia in the short term, analysts believe it will ultimately help the company maintain its lead in the cloud space.
Amazon’s Retail Strength and AWS Growth Drive Confidence
Eric Sheridan, an analyst at Goldman Sachs, reiterated a Buy rating on Amazon with a price target of $250, up from $225. He cited strong consumer demand and improving margins in Amazon’s eCommerce business as key drivers for his optimism. Sheridan also highlighted the company’s ability to continue producing operating income margin upside through a combination of factors, including:
- Operating leverage on fixed retail assets: This means Amazon can increase revenue without a proportional increase in costs.
- Continued progress on lowering costs: Amazon has been actively reducing costs in areas like logistics and fulfillment.
- Moderate rate of inflation of important input costs: Inflation has begun to ease, providing some relief for Amazon’s cost structure.
- High-margin contribution of growing revenue streams: Amazon’s advertising business continues to grow rapidly and contribute significant profits.
Sheridan also sees a significant opportunity for AWS to reaccelerate its growth in the coming years. He expects this growth to be driven by:
- Optimization and workload migration: Prior headwinds related to these factors are expected to turn into tailwinds.
- AI workloads: The increasing adoption of AI is creating a significant opportunity for AWS.
Sheridan is projecting fiscal 2024 revenue and operating income of $633.89 billion and $64.48 billion, respectively, and fiscal 2025 revenue and operating income of $697.93 billion and $82.76 billion.
AI Focus and Chip Transition: A Potential Long-term Advantage
Brad Erickson, an analyst at RBC Capital, agrees with the overall positive outlook for Amazon. He reiterated an Outperform rating on the company with a price target of $215. Erickson is particularly bullish on Amazon’s position in the AI market and believes the company’s focus on developing its own AI chips will eventually give it a competitive edge, even if the transition away from Nvidia’s GPUs creates some short-term challenges.
Erickson’s recent conversations with software companies suggest that Amazon’s GPU activity has improved significantly in the second quarter, suggesting that the company is making progress in bridging the gap between its current offerings and Nvidia’s leading GPUs. This shift away from Nvidia is a complex and ongoing process, and Erickson believes the full impact of this transition will not be fully realized until after the second quarter. Despite the uncertainty, Erickson sees Amazon’s commitment to AI and its investment in its own chip technology as a long-term advantage.
Navigating the Cloud Computing Landscape: Competition and Margin Pressure
Although analysts are positive about Amazon’s overall growth potential, concerns remain about competition in the cloud computing space. Microsoft Corp. (MSFT) and Google LLC (GOOGL) are both aggressive competitors in this market, and both companies are investing heavily in AI. The cloud computing market is expected to grow significantly in the coming years, but the competition for market share is intense, which could put pressure on margins.
Erickson expects Microsoft and Google to continue to grow faster than AWS in the short term, but he anticipates AWS will eventually regain its position as the leader in terms of marginal dollar growth.
Upcoming Earnings Report: Key Focus Areas
Amazon’s second-quarter earnings report is expected to provide further insight into the company’s performance across all its key business lines:
- Ecommerce performance: Investors will be looking for details on the health of Amazon’s core retail business and signs of continued growth in areas like online groceries and subscriptions.
- AWS growth: Investors will be looking for evidence of reacceleration in AWS revenue growth, particularly in areas like AI and cloud services for businesses.
- Advertising revenue: Amazon’s advertising business has been growing rapidly, and investors will be looking for evidence of continued momentum in this segment.
- Margin performance: Investors will be looking for signs of progress on margin expansion, which is crucial for Amazon to maintain its profitability and compete effectively in a challenging economic environment.
- AI strategy: Investors will be looking for more details about Amazon’s long-term AI strategy, including its plans for chip development and its approach to AI-powered services.
While the overall sentiment is positive, Amazon faces a multitude of challenges, including inflation, competition from both traditional retailers and cloud providers, and the need to invest heavily in AI and new technologies. The company’s second-quarter earnings report will be a crucial opportunity for Amazon to demonstrate its ability to navigate these challenges and continue its growth trajectory.
