Amazon (NASDAQ: AMZN) stock climbed post-market following its first-quarter earnings report, surpassing estimates on both revenue and earnings. The company reported a 13% increase in overall revenue to $143.3 billion, exceeding expectations at $142.4 billion, with earnings per share (EPS) rising from $0.31 to $0.98, beating the consensus of $0.82, despite a $2 billion non-cash loss in its investment in Rivian.
Delving beyond the headline figures, let’s explore why Amazon presents a compelling buying opportunity post the recent report.
Image source: Amazon.
Embracing Margin Growth
Historically operating close to breakeven, Amazon is now reaping the benefits of increased profit margins in all three business segments. The favorable macroeconomic environment, along with cost-cutting measures including layoffs, have contributed to the notable surge in margins. In the North America segment, predominantly e-commerce, revenue soared 12% to $86.3 billion, while operating income jumped significantly from $898 million to $5 billion. This growth was powered by the strong performance of higher-margin segments like third-party seller services, rising 16%, and advertising, increasing by 24%.
The international segment, previously incurring losses, turned around an operating loss of $1.2 billion to a profit of $903 million as revenue grew by 10% to $31.9 billion. Mature international markets transitioning to profitability have been a key driver in this segment. Furthermore, Amazon Web Services (AWS), the cloud-infrastructure arm, witnessed a near-doubling of operating income from $5.1 billion to $9.4 billion.
Although the impact of last year’s layoffs will taper off, Amazon’s margins are poised for further enhancement as higher-margin segments outpace the lower-margin ones.
Accelerating Growth in AWS
Primarily fueling Amazon’s growth and profit for the past decade, AWS experienced a recent slowdown, which has now been reversed with revenue growth gathering pace. The Q1 earnings review highlighted a 17% growth in AWS, mounting to $25 billion, marking its fastest rate since Q4 2022.
During the earnings call, CEO Andy Jassy emphasized that companies have completed the cost optimizations initiated during last year’s tech slump and are refocusing on expansion. Additionally, the shift from on-premise to cloud-based IT, paused by COVID-19 uncertainty, is recommencing. The long-term potential in cloud computing remains robust, positioning AWS favorably to capitalize on this resurgence following a temporary setback.
Valuation Realignment
As Amazon’s profitability ascends, its valuation is gradually adjusting to a more rational level relative to industry peers. While still relatively pricier than most stocks in the “Magnificent Seven,” the stock currently trades at a P/E ratio of 50, expected to further decline as margins expand and revenue grows.
A diminishing P/E ratio not only offers investors an improved entry point into Amazon stock but also shields the stock from sharp declines on subpar earnings releases.
Though not classified as inexpensive, Amazon’s valuation now appears significantly more reasonable compared to a year or two prior, attracting a broader investor base.
Leveraging Investment Opportunities
Before considering an investment in Amazon, it’s essential to note:
The Motley Fool Stock Advisor analysts have highlighted the 10 best stocks for investment currently, with Amazon not included. These selected stocks have the potential to yield substantial returns in the foreseeable future.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jeremy Bowman has positions in Amazon. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.
