Amazon.com Inc (AMZN) Com Stk USD0.01

Amazon reported first-quarter net sales of $143.3bn, a 13% increase from last year. Operating income more than tripled from $4.8bn to $15.3bn, well ahead of consensus. Performance was driven by AWS (which saw top-line growth reaccelerate to 17%), strong growth in advertising, and recovering profitability from the retail divisions given improved margins.

Free cash flow was $50.1bn on a trailing twelve-month basis, compared to a $3.3bn outflow in the prior year. Including leases, net debt was $49.6bn as of March.

Second quarter net sales are expected to grow 7-11% year-on-year and reach $144.0-$149.0bn. Operating income is expected to be between $10.0-14.0bn.

The shares rose 1.2% in pre-market trading.

Our view

First quarter results couldn’t have been much better for Amazon. The cost-cutting mission in retail means profits have rebounded, enterprise cloud spend looks to be reaccelerating and the advertising business is booming. The only thing keeping a lid on the market reaction was a slightly conservative guidance for the second quarter.

Margins have been resuscitated following the better revenue and gargantuan cost-saving efforts, including lay-offs. Profits have come back to life. US consumer spending's continuing to rise, meaning for now, higher interest rates aren't hampering things. But things are far from solved. The consumer environment remains uncertain and this could yet worsen, so this will be something to monitor.

But away from the instantly-recognisable cardboard parcels on doorsteps is Amazon's crowning jewel. Amazon Web Services (AWS) is Amazon's not-so-secret weapon. Its potential is huge.

As companies increasingly harness new technologies and infrastructure, there are AWS products poised and waiting to be adopted. There have been some grumblings about whether cloud spend would pick back up after several quarters of slowing growth. These results could mark the turnaround, and strong cloud performance is something that peers Google and Microsoft also saw in their results.

Ultimately, we think AWS' position in the AI and cloud stack is a positive one, and the substantial investment in AWS' generative AI products speaks volumes to the expected pipeline of demand.

We're also supportive of growth in services, like Prime, and the group's advertising arm. It's been impressive to see the latter making progress. Troves of data footprints and millions of customers ready and willing to click buy are a marketer's dream.

Digging down under the hood it's nice to see free cash flowing through the business. This helps support investment for growth.

While the valuation has come down from its headiest days, Amazon is still an expensive stock on traditional metrics. That's largely a reflection of the prospects for AWS, and there's no denying it has a dominant position in a long-term growth market. In areas like advertising we think there’s enough here to make the stock worthy of its premium valuation. But competition in the cloud space is heating up, and the e-commerce arm is seeing top-line growth slow a touch so it’s something to watch.

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