Amazon’s Q3 Earnings Surge: A Strong Investment Move
Amazon (AMZN), based in Seattle, recently announced impressive earnings for the third quarter, surpassing expectations and boosting its share price. As a long-term supporter of the company, I am uplifted by Amazon’s consistent growth and profitability in its Amazon Web Services (AWS) division, its most lucrative segment. The company’s solid cash flow growth and efficient cost management also add to its investment appeal. Notably, Amazon’s cash flow multiples are attractive when compared to its main competitors in the sector.
This article highlights significant insights from Q3, reinforcing why Amazon is an attractive option for investors, both within the cloud sector and across its diverse business operations.
High Points of Amazon’s Q3 Earnings
Amazon’s earnings report for the quarter exceeded expectations, highlighting a year-over-year sales growth of 11%, totaling $159 billion. North American sales rose by 9%, while AWS sales grew by 19% compared to last year.
The operating income reached $17.4 billion, a significant increase from $11.2 billion last year, marking about 50% growth. North America contributed $5.7 billion in operating income, while International operations generated $1.3 billion, a substantial recovery from a loss in the same period last year. AWS saw its operating income increase to $10.4 billion, up from $7 billion last year. Notably, AWS’s operating income is growing at a faster rate than its revenue, signaling improving profit margins—an encouraging sign for Amazon’s overall profitability.
Looking ahead, Amazon provided optimistic guidance, projecting fourth-quarter sales between $181.5 billion and $188.5 billion, which translates to a 7% to 11% increase compared to last year, suggesting continued revenue growth.
Broadening Growth Beyond AWS
AWS remains key to Amazon’s success as its highest-margin segment. This quarter, AWS revenues climbed to $27.4 billion, up from $23 billion last year, an increase of $4.4 billion, with operating margins holding strong at 38%. Beyond AWS, Amazon has several growth areas.
However, growth in segments like third-party seller services and advertising has slowed somewhat over the past year. For example, advertising growth dipped from 25% to 19%, while third-party seller services slowed from 18% to 10%.
Despite these slowdowns, Amazon operates a well-diversified business, generating billions across multiple segments, mostly showing double-digit growth rates. Only online store revenue grew at 8%. Overall, Amazon’s diverse growth drivers position it well for future growth, particularly if it can maintain improving profit margins.
Robust Cash Flow and Capital Spending
Amazon’s favorable outlook is bolstered by an operating cash flow of $112.7 billion over the past year, representing a 57% increase over last year, with free cash flow at $47.7 billion. It’s worth noting that Amazon’s capital expenditures (CapEx) surged to $22.6 billion this quarter, nearly doubling year-over-year. For the first three quarters of this year, CapEx totaled $55.2 billion, up from $38.1 billion last year, with a trailing twelve-month total nearing $70 billion.
Like its peers Meta (META), Microsoft (MSFT), and Alphabet (GOOGL), Amazon invests heavily to expand its cloud and AI capabilities. This rising CapEx trend among tech giants can strain free cash flow.
Consequently, I find operating cash flow the most telling metric for evaluating Amazon’s value against its historical performance.
Valuation: Leading Among Hyperscalers
Given Amazon’s strong cash flow performance, its valuation appears attractive. It trades at a price-to-cash flow multiple of 18.4x, nearly 30% below its five-year historical average. By comparison, rivals like Alphabet and Microsoft trade at multiples of 20x and 25x, respectively, placing Amazon at a notable discount despite its leadership status in the cloud services market.
Therefore, it is reasonable to assert that Amazon is one of the most competitively priced stocks among major tech firms in the cloud arena, especially considering its ongoing robust growth in high-margin areas.
Wall Street’s Buy Recommendations on AMZN
My positive perspective aligns with Wall Street’s consensus on Amazon. Analysts on TipRanks rate the stock as a Strong Buy, featuring 45 Buy ratings compared to only one Hold. The average price target stands at $236.20, suggesting an upside potential of 19.34%.
View more AMZN analyst ratings
Final Thoughts
Based on Amazon’s remarkable Q3 performance, I rate the stock as a Buy. The company shows strong growth across multiple segments, especially in AWS, which is crucial for revenue and margin growth.
Moreover, Amazon’s ability to generate substantial cash flow, alongside significant investments in crucial areas like cloud and AI, emphasizes its commitment to long-term growth. Considering the current market dynamics where Amazon’s cash flow multiples are lower than those of its peers, my bullish outlook on this Seattle-based giant remains robust.
Disclosure
Disclaimer
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
