The rejuvenated Amazon, how many surprises there are

Visual China.

Text |Dolphin Investment Research.

1.Growth has been steadily improving, and profits have exceeded expectationsIn terms of overall performance, Amazon achieved total revenue of $170 billion this quarter, nearly 4 billion higher than market expectations. Revenue growth continued to increase by 13pct to 139%，The main positive results were the increase in the growth rate of US dollar revenue in international business after the decline in the US dollar exchange rate, as well as the strong performance during the fourth quarter promotion in North America.

Overall operating profit came in at $13.2 billion, about $2.8 billion, or 26 percent, higher than market expectations. It is the biggest highlight of this financial report. The significant improvement in retail margins in North America was the main reason for the higher than expected margins.

2.AWS Stable Revenue and Profit Surge: AWS revenue of $24.2 billion in the quarter increased slightly to about 13% sequentially, which was basically in line with market expectations. Due to the ebb of the IT spending optimization cycle of enterprises in Europe and the United States, and the incremental demand brought by AI investment, the growth rate of AWS will pick up marginally.

However, compared with the three major cloud service providers in the United States, compared with the obvious acceleration of Azure and GCS in the past two quarters, AWS has only bottomed out and stabilized. It also reflects the relative competitive disadvantage of AWS in terms of AI capabilities, and is also a major concern in the market at the moment.

Profit-wise,AWS reported an operating profit of $7.2 billion in the quarter, with operating margin declining slightly to 29.2 percent sequentially from over 30%.6%, well above market expectations of 6.6 billion. Although the growth is only the bottom of compound expectations**, the margin improvement is still significantly stronger. The reason for the decline in the rate of R&D expenditure is visible, and it can be seen whether there are other explanations from management.

3.Exchange rate reversal and strong promotions help retail sector continue to accelerate: The company's retail segment achieved revenue of $145.8 billion in the quarter, a year-over-year growth rate of 14%.This is an increase of 14pct。

On the one hand, yesBenefiting from the decline in the US dollar exchange rate, US dollar revenue growth in the international region has reached 17% (13% after excluding the impact of exchange rates). and not affected by the exchange rateGrowth in North America also increased by 2pct to 13%.Also in the obvious recovery, combined with recent reportsThis is mainly due to the strong consumption momentum during the Thanksgiving and Christmas holiday promotions.

In terms of business,This is mainly due to the fact that advertising revenue growth remains strong, with a growth rate of 268%。Dolphin believes that on the one hand, this is a continuation of the trend of advertising expectations skewing towards performance advertising, and on the other hand, the company has also recently announced a business to provide TV advertising on Prime Video streaming**, which is expected to continue to drive ad revenue growth.

4.Retail sector margins headed for record highs:The most anticipated aspect of this performance was the significant improvement in the margins of the retail business in North America. This seasonThe North American retail segment reported an operating profit of nearly $6.5 billion, which was about 52% higher than the expected $4.2 billion. Operating margin also improved sequentially to 61%, the second-highest margin in the history of the North American business. Dolphin Investment Research believes that on the one hand, this is due to the continuous increase in the proportion of high-profit advertising revenue and the reduction of the company's investment in content service providers, and on the other hand, it is naturally caused by the optimization of unit costs after the company has partitioned North American fulfillment.

Combined with expenses, the performance expense ratio decreased slightly by 0 year-on-year and month-on-month1-0.2pct。Although the magnitude is modest, it reflects an improvement in the efficiency of compliance. And we think the benefits of zoning will be further fully felt in the following quarters. On the other hand,The expense ratios of R&D and content contracted by 1pct year-on-year and 1.QoQ, respectively8pct, a very significant decline, was one of the biggest contributors to the profit improvement。Dolphin Investment Research believes that this reflects the company's layoffs in R&D and the first audio-visual business, as well as a reduction in investment. It is also one of the main reasons for the significant improvement in the profit margin of the retail segment.

5 The guidance continues to be good:For the first quarter guidance, the company expects median revenue of 140.8 billion, although it seems to be below the consensus of 1420. However, the actual delivery of the reference company is generally attached to the upper limit of the guidance range, and the upper limit of 143.5 billion is still higher than market expectations. The operating profit guidance range is 80-12 billion, which is also lower than the median of 9.1 billion expected, but it is also nearly 1 3 higher than the upper limit of the guidance. VisibleThe outlook for the company's guidance is more optimistic

Dolphin Investment Research Viewpoint:

Before the results, the market generally showed short-term surprises in the narrative logic of Amazon, but there were also concerns in the long term. On the one hand, in the retail sector, the market has agreed that the performance in the fourth quarter will be relatively strong (the high-frequency data during the promotion period has been verified). But due to the possibility of a weakening economy that cannot be ruled out in '24, the market's confidence in the growth of the retail business in the second half of '24 is not so sufficient.

As for the profit margin of the retail business, with the previous layoffs and investment reductions, the decline in oil prices, as well as the long-term trend of performance zoning, 3P service price increases, and the long-term trend of increasing the proportion of high-margin advertising revenue, the market is no longer satisfied with the profit margin margin of North American retail in the high single digits, and some investment banks have even begun to look forward to low double digits. In other words, there is still considerable potential for improvement in the margins of North American retail. Combined with growth and profits, the outlook for the retail business as a whole is bright.

However, there is a more heated debate on the AWS business, with a general consensus that the current IT spend optimization cycle is coming to an end and overall cloud computing demand is starting to pick up. On the other hand, there is also an argument that increased investment in AI will also squeeze budgets on traditional cloud services. (Azure's actual continued decline in growth after excluding AI-related seems to be a validation.) Therefore, while Microsoft and Google currently have a clear advantage in AI large models, AWS, which is still lagging behind, may become a victim of losing share.

And this financial report basically perfectly verifies: strong retail growth in the fourth quarter; Breaking through the historical trend towards high-single-digit or even double-digit margins in the North American retail business; AWS growth has bottomed out and stabilized, but not significantly accelerated, although margins remain high. In other words, the quarter's results are in line with recent surprises, and the guidance for the first quarter still points to an optimistic scenario.

Therefore, we believe that Amazon is currently in a good cycle of continuous improvement in performance, especially profits, and sentiment is expected to continue to rise in the near term, and strong employment in the United States still means that consumption still has a relatively strong driving force in the short term.

In terms of cloud business, its cloud business has been weak due to the sluggishness of AI promotion compared to peers + the reduction cycle of enterprise IT spending + weak competition. This year, it is expected to benefit from the recovery of overall demand, and there is room for upward return compared to its past low growth rate, but it will be relatively low compared to Azure and GCS.

As for the growth prospects of the retail business in the full year of 24, as well as the magnitude and pace of the growth rate of AWS in the medium term, these two markets will affect the company's medium-term trend.

The detailed review is as follows:

AWS revenue for the quarter was $24.2 billion, a slight increase of approximately 13% sequentially, in line with market expectations. Due to the ebb of the IT spending optimization cycle of enterprises in Europe and the United States, and the incremental demand brought by AI investment, the market is also widely expected to start to pick up the growth rate of AWS.

However, a horizontal comparison of the three major cloud service providers in the United States shows that compared with the obvious acceleration of cloud computing business in the past two quarters of Azure and GCS, AWS has only bottomed out and stabilized. While the overall demand for cloud computing is expected to pick up, AWS's continued loss of market share is one of the key concerns for the market as AWS lags behind in AI capabilities.

But in terms of profits,AWS reported an operating profit of $7.2 billion in the quarter, with operating margin declining slightly to 29.2 percent sequentially from over 30%.6%, well above market expectations of 6.6 billion. Therefore, although the growth is only in line with the expected bottoming**, the margin improvement is still significantly stronger, and the reason why the profit margin did not decline as expected can be seen whether the management has an explanation in the meeting.

Compared with the cloud business, there are mixed blessingsThe revenue and profit performance of the retail segment exceeded expectations across the board. Amazon's this seasonRetail revenue was $145.8 billion, up 14% year-over-yearThis is an increase of 14pct。

In terms of regions,Revenue growth in the international region has recovered rapidly on the back of the decline in the U.S. dollar, with a growth rate of 17% in the quarter (with foreign exchange factors contributing 4pct growth).。In addition,Growth in North America also increased by 2pct to 13%.There has also been a rebound, combined with recent reports, mainly due to the strong online retail during holiday promotions such as Thanksgiving and Christmas.

North America remained resilient slightly, while the international region benefited from favorable currency effects, resulting in growth in all segments of the retail segment**Sort by growth rate,The advertising business had the highest growth rate of 268%The company also recently announced its advertising business on Prime Video, and there is still growth momentum in the future.

By the magnitude of improvement,Online self-operated retail, which contributed the largest revenue contribution, grew by 71% to 93%, the largest increase.

Subscriptions and 3P merchant services businesses maintained flat sequential growth, while offline retail growth continued to decline.

Sum up the cloud business and the retail businessAmazon generated total revenue of about $170 billion in the quarterWith both retail and AWS business growth picking up, the total revenue growth rate also increased to 14%.Higher than market expectations of 166.2 billion.

In terms of revenue, the performance of the retail business has been solidIn terms of profits, the profits of the retail sector continued to increase considerably in this quarter after the recovery in the previous quarter. Specifically,The company as a whole achieved an operating profit of $13.2 billion in the quarter, far exceeding market expectations and $10.5 billion, and the operating margin remained at a high level of 7.2 billion8%。

Look at the sub-sections,AWS's cloud operating profit of $7.2 billion was 8% higher than expected。WhileThe operating margin of the North American retail segment has increased from 49% QoQ increased to 61%, which is the second highest level in history.

Although the loss rate of the international retail sector widened to -1% month-on-month during the promotion season, it was still -1 more than expected8% should be low.

Therefore,AWS, North American Retail, and International Retail delivered better-than-expected operating margins across the board in the quarter.

So what are the better-than-expected profit margins across the board from a cost and expense perspective?

Broken down, 1).The gross profit margin in the quarter decreased by 21pct to 455%，However, it is still slightly higher than expected5pct，2）on the costIn North America, the implementation of regional distribution and the decline in oil prices seem to have a slight decrease of 01-0.2pct, but the benefits have not yet been fully reflected.

WhileThe decline in R&D and content spending was significant and was one of the biggest contributors to the improvement in profitsThe expense ratio contracted by 1pct year-on-year and 18pct, a very significant drop。Dolphin Investment Research believes that the company's layoffs of engineers and sales personnel in AWS and ** audio-visual businesses, as well as the reduction of investment, should be the main reason for the decline in expenses.

As for the sales expense rate, it is relatively stable, which may be caused by the company's marketing investment in the big promotion season.

However, despite the advent of the AI boom,The investment in fixed assets in the quarter reached 13.4 billion, an increase of about 2 billion yuan from a quarter-on-quarter perspective, mainly invested in hardware facilities such as servers and GPUs.