Amazon.com Inc. - Margins expansion still the main story

30 Oct 2023
  • 3Q23 revenue was in line with our expectation, while earnings exceeded. 9M23 revenue/PATMI was at 73%/98% of our FY23e forecasts. Earnings outperformance was due to higher-than-expected gross margins and lower-than-expected operating expenses.
  • Operating income more than tripled YoY due to the benefits of network regionalisation in the US, easing inflation, strong advertising growth, and lower headcount. AWS growth has stabilised as the rate of customer cost-optimisation continues to attenuate.
  • We maintain a BUY rating with an increased DCF target price of US$190.00 (prev. US$175.00), with a WACC of 6.4% and terminal growth rate of 5%. We increase our FY23e revenue/PATMI forecasts by 2%/31% to account for the higher-than-expected operating leverage.

The Positives

+ Margins continue to improve. Gross and operating margins expanded by ~300bps and ~600bps YoY, respectively. Operating income more than tripled YoY to a record level of US$11.2bn, beating the top-end of US$8.5bn company guidance. The retail business benefitted from the lower cost to serve because of its fulfillment network regionalisation initiative in the US, easing inflationary pressure in line-haul, ocean, and rail shipping rates, as well as the strong 26% YoY growth of its advertising business (7% of revenue). AWS operating margin also expanded by 600bps QoQ and 400bps YoY, back to the level last seen in 2Q22, primarily driven by headcount reductions in the business and lower energy costs. 

 

+ AWS growth stabilised. Segment revenue was up by 12% YoY, in line with management’s guidance of stabilising growth. Despite customer cost-optimisation efforts being relatively elevated compared to 2022, it is starting to meaningfully attenuate as more companies shift their focus towards deploying new workloads. Management expects the rate of such optimisations will continue to ease in the next several quarters. Furthermore, AMZN indicated that it signed several deals with customers that will take effect in 4Q23, including those where existing customers expand their AWS deployments and move away from short-term contracts to commitments ranging between 1-3 years. Hence, we expect growth will start to re-accelerate in the near term.

 

+ Strong free-cash-flow. Trailing-twelve-months (TTM) FCF was US$21.4bn, tripling QoQ and a US$41bn improvement YoY. This was driven by the increased operating income in both retail and AWS segments, improved leverage on fixed costs and working capital efficiency.

 

The Negative

– Nil.

About the author

Maximilian Koeswoyo
Research Analyst
PSR

Maximilian mainly covers the US technology sector. In his strive to be a globalized citizen and get continuous exposure to the fundamentals of companies from various industries, he graduated from Singapore Management University holding a Bachelor’s degree in Business Management.

Latest Reports

Join Events & Seminars

Learn best practices and latest market outlook from experts and special guests

Hear & Ask our Experts

Join live weekly market calls

Read Popular News & Reports, Technical Pulses

at www.stocksbnb.com

Subscribe to our YouTube Channel

New video every week

Contact us to Open an Account

Need Assistance? Share your Details and we’ll get back to you

IMPORTANT INFORMATION

This material is provided by Phillip Capital Management (S) Ltd (“PCM”) for general information only and does not constitute a recommendation, an offer to sell, or a solicitation of any offer to invest in any of the exchange-traded fund (“ETF”) or the unit trust (“Products”) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. You should read the Prospectus and the accompanying Product Highlights Sheet (“PHS”) for key features, key risks and other important information of the Products and obtain advice from a financial adviser (“FA“) pursuant to a separate engagement before making a commitment to invest in the Products. In the event that you choose not to obtain advice from a FA, you should assess whether the Products are suitable for you before proceeding to invest. A copy of the Prospectus and PHS are available from PCM, any of its Participating Dealers (“PDs“) for the ETF, or any of its authorised distributors for the unit trust managed by PCM.  

An ETF is not like a typical unit trust as the units of the ETF (the “Units“) are to be listed and traded like any share on the Singapore Exchange Securities Trading Limited (“SGX-ST”). Listing on the SGX-ST does not guarantee a liquid market for the Units which may be traded at prices above or below its NAV or may be suspended or delisted. Investors may buy or sell the Units on SGX-ST when it is listed. Investors cannot create or redeem Units directly with PCM and have no rights to request PCM to redeem or purchase their Units. Creation and redemption of Units are through PDs if investors are clients of the PDs, who have no obligation to agree to create or redeem Units on behalf of any investor and may impose terms and conditions in connection with such creation or redemption orders. Please refer to the Prospectus of the ETF for more details.  

Investments are subject to investment risks including the possible loss of the principal amount invested. The purchase of a unit in a fund is not the same as placing your money on deposit with a bank or deposit-taking company. There is no guarantee as to the amount of capital invested or return received. The value of the units and the income accruing to the units may fall or rise. Past performance is not necessarily indicative of the future or likely performance of the Products. There can be no assurance that investment objectives will be achieved.  

Where applicable, fund(s) may invest in financial derivatives and/or participate in securities lending and repurchase transactions for the purpose of hedging and/or efficient portfolio management, subject to the relevant regulatory requirements. PCM reserves the discretion to determine if currency exposure should be hedged actively, passively or not at all, in the best interest of the Products.  

The regular dividend distributions, out of either income and/or capital, are not guaranteed and subject to PCM’s discretion. Past payout yields and payments do not represent future payout yields and payments. Such dividend distributions will reduce the available capital for reinvestment and may result in an immediate decrease in the net asset value (“NAV”) of the Products. Please refer to <www.phillipfunds.com> for more information in relation to the dividend distributions.  

The information provided herein may be obtained or compiled from public and/or third party sources that PCM has no reason to believe are unreliable. Any opinion or view herein is an expression of belief of the individual author or the indicated source (as applicable) only. PCM makes no representation or warranty that such information is accurate, complete, verified or should be relied upon as such. The information does not constitute, and should not be used as a substitute for tax, legal or investment advice.  

The information herein are not for any person in any jurisdiction or country where such distribution or availability for use would contravene any applicable law or regulation or would subject PCM to any registration or licensing requirement in such jurisdiction or country. The Products is not offered to U.S. Persons. PhillipCapital Group of Companies, including PCM, their affiliates and/or their officers, directors and/or employees may own or have positions in the Products. Any member of the PhillipCapital Group of Companies may have acted upon or used the information, analyses and opinions herein before they have been published. 

This advertisement has not been reviewed by the Monetary Authority of Singapore.  

 

Phillip Capital Management (S) Ltd (Co. Reg. No. 199905233W)  
250 North Bridge Road #06-00, Raffles City Tower ,Singapore 179101 
Tel: (65) 6230 8133 Fax: (65) 65383066 www.phillipfunds.com