After the bell yesterday, Amazon reported their calendar Q1 earnings, and as has been the case in the past, seemed to defy conventional wisdom about what matters to the market in an earnings report. Forward guidance, usually the main driver of a stock price after an earnings release, was slightly disappointing, but traders are focusing instead on the good EPS numbers for the most recent three months.
Those numbers showed a big increase in profitability, with Amazon’s margins at double figures. That is the first time they have hit that milestone, but it isn’t the first time Amazon has concentrated on profits rather than growth, and the timing of this iteration could be construed a warning to investors.
There is a lot that is remarkable about Amazon (AMZN) over the years, but perhaps the most interesting thing about the company for students of microeconomics and corporate behavior has been their ability to turn the profit tap on and off. The popular perception is that Amazon has always been completely focused on growth, but that isn’t the case. There have been times, most notably in 2009 and 2010, when they have paused their program of relentless growth for a while to focus on profits.
Given the overall economic climate at that time, that looks like the company was reassuring investors, showing that they were prepared to knuckle down and focus on earnings, and more importantly, that they could do that whenever they wanted.
From an internal perspective, that is a great message to send to Amazon investors this time around, too. After a period of growing profits, the company has been back to buying growth again as they invested heavily in Amazon Web Services (AWS) and other fee for service business, adding to the retail and logistics business on which the company was built.
A reminder that Amazon can make money from those investments seemingly whenever they want to is reassuring to those who hold the stock. But should investors be worried about the timing? After all, Amazon has a history of demonstrating that ability when things are tough or when the company thinks tough times are on the way.
There is probably no company with a better sense of economic conditions in America than Amazon. They dominate online retail in America, with sales that reached a Gross Merchandise Value (GMV) of between $510 and $546 billion in 2023, according to experts quoted in this Forbes piece. Is the fact that Amazon seems to have felt the need to show its ability to make money a warning, especially when it is combined with a weaker than expected forward guidance?
It might be, but there is a lot that is different about this cycle for Amazon. First, Andy Jassy only took over at the end of 2020, so it is probably a mistake to extrapolate anything from the company’s actions from before that and apply it to today. Then there is the fact that Amazon’s business is completely different now to what it was in the past. The growth of AWS, with its relatively high margins, has made it quite possible that increased profitability from Amazon last quarter is more of an inevitable development than a conscious decision.
Still, the margin improvement wasn’t just down to a changing mix of business. It was also a result of some quite aggressive cost cutting by Jassy, which suggests that he isn’t convinced that the future is exactly looking rosy. Then if you add that to the slightly weak guidance, Amazon’s earnings do look like a warning of possible tough times ahead. What we don’t know, of course, is how good Jassy is at making that kind of prediction. History tells us that Jeff Bezos was good at it, but does the new CEO have the same ability?
That remains to be seen, but for now, it is prudent to see any battening down of hatches by Amazon as a reason to be cautious in the near future, and that seems to be the message sent by this earnings report.
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