After the bell on August 3, Amazon will release its 2023 second quarter earnings report. Conditions of the U.S. consumer environment marginal upward in the second quarter, the focus of attention in this earnings outlook is on the magnitude of the rebound in the e-commerce business and whether the margins of the AWS business can improve.
- E-commerce business is expected to continue to create profit surprises
From the revenue side, the U.S. consumer economic environment improved in the second quarter compared with the previous quarter, and consumer confidence recovered as inflation declined to reduce consumer pressure. The economic situation in some European countries also synchronized with the recovery, and the base for the same period last year is low. The recovery of consumer spending will effectively support the growth of North American and international retail business. From the cost side, the results of cost reduction and efficiency improvement in the previous period have appeared quarter by quarter, and some internal and external unfavorable factors affecting e-commerce profit in the previous period, such as logistics and energy, have gradually eased in the past few quarters. The transformation of the logistics fulfillment network has helped to improve logistics speed and reduce fulfillment costs, improving e-commerce profitability. We believe that benefiting from the improved consumer environment, cost reduction and efficiency, logistics network reform in the second quarter, online e-commerce business revenue improvement space is considerable, e-commerce profits continue to exceed expectations is more likely.
- AWS business downturn may continue
Comparison of competitors in the same industry, Microsoft's Azure and other cloud services business growth of 26% in the second quarter, compared with 31% in the last quarter also declined further, and the management of the next quarter of the cloud business growth rate is relatively pessimistic. Revenue growth in April was about 500 basis points lower than in the first quarter of fiscal 2023, according to Amazon's management call last quarter. The cloud downturn is likely to continue, as the trend of enterprise customers cutting back and optimizing cloud usage did not pick up significantly in the second quarter. However, the downward trend in AWS margins is expected to stop in the current quarter, thanks to cost-cutting and efficiency measures such as layoffs and lower energy costs.
- Advertising business to maintain high growth rate
Advertising business revenue growth is expected to accelerate, and the advertising business showed clear signs of recovery from the second quarter reports of Google and Meta. In the relatively weak macro environment last quarter, Amazon's advertising business grew 20% year-on-year, reflecting strong growth. As advertisers are looking for more effective channels, Amazon is competitive with its more accurate lead generation and conversion rate by leveraging its large amount of user data and its closer proximity to end-user shopping needs. We expect the rebound in advertising revenue may accelerate in the second quarter, and the advertising business enjoys higher margins and is expected to contribute more profit in the second quarter.
Based on the Bloomberg Consensus Estimates, Q2 sales are expected to be $131.6 billion, up 8.5% year-over-year, and operating profit is expected to be $4.7 billion, up 42% year-over-year; in the middle to upper range of management guidance;
We believe Amazon is expected to continue to beat market expectations for revenue and profit in the current quarter, benefiting from a clear path of improved performance in its North American and international retail businesses. However, any shortfall on the AWS front will affect share price performance to a greater extent. Given the unresolved macro headwinds in cloud computing, we believe that even if overall profit exceeds expectations, if AWS margins and growth do not outperform expectations in the current quarter or next quarter's guidance is poor, this will affect share price performance to a greater extent. Year-to-date Amazon stock price rose nearly 50%, after the performance of the upside space although there is but more limited. In terms of options strategy, investors are advised to adopt Covered Call strategy.
Cloud business is not as expected; consumer confidence is not enough; industry competition intensifies; regulatory policy risk