Amazon's (AMZN -0.17%) The AWS (Amazon Web Services) segment was the number one reason to invest in the company's stock throughout the 2010s. This decade saw cloud computing take over, with billions of dollars a year poured into next-generation software infrastructure. The pioneer in “renting” excess computing power in data centers has experienced tremendous growth and has become a major source of Amazon's operating profits.
But let's not forget about the e-commerce segment. This segment is currently at an important inflection point of its own. Amazon's original e-commerce business is finally starting to generate big profits, making the tech giant's stock a potential buy right now.
Amazon returns to its roots as AWS finds bottom
Much of the buzz surrounding Amazon this summer centered on AWS's slowing revenue growth and declining operating margins. Competition (probably from things like) oracle Cloud), but also because some customers cut back on spending to optimize their cash flow.
Despite the so-called slowdown in growth (12% year-over-year expansion is no joke for a business with annual sales of $92 billion), AWS's operating margin is expected to exceed 30% in Q3 2023. It rose sharply. This is still a good reason to remain invested in Amazon stock.
|
period |
AWS revenue |
AWS YoY Revenue Growth |
Operating profit margin |
|---|---|---|---|
|
Full year 2022 |
$80.1 billion |
29% |
28% |
|
Q1 2023 |
$21.4 billion |
16% |
twenty four% |
|
Q2 2023 |
$22.1 billion |
12% |
twenty four% |
|
Q3 2023 |
$23.1 billion |
12% |
30% |
Data source: Amazon. Graph by author.
However, let's talk about e-commerce businesses, as a similar trend of increasing operating margins may have just begun. After more than a year in the red, the company's North American and international business, which includes e-commerce platforms, is not just back in growth mode. It's also profitable again, or at least in the case of its international division, well on its way to becoming profitable again.
|
period |
North American revenue |
Operating income (loss) |
overseas earnings |
Operating income (loss) |
|---|---|---|---|---|
|
2019 |
$171 billion |
4.1% |
$74.7 billion |
(2.3%) |
|
2020 |
$236 billion |
3.7% |
$104 billion |
0.6% |
|
2021 |
$280 billion |
2.6% |
$128 billion |
(7.2%) |
|
2022 |
$316 billion |
(0.9%) |
$118 billion |
(6.6%) |
|
First 9 months of 2023 |
$247 billion |
3.4% |
$91 billion |
(2.5%) |
Data source: Amazon. Graph by author.
After right-sizing its warehouse, order fulfillment, and logistics network for a post-pandemic world (read: “not just a digital world”), Amazon's e-commerce is on track to achieve healthy profit margins again. I'm riding on. This is great news for shareholders who have been concerned about the stock's recent “overvalue''.
There's no longer a hard line between AWS and e-commerce — and that's OK
What exactly does this e-commerce empire house? Amazon doesn't just sell things online, it's transformed itself into a platform that other companies can build on top of like never before. I'm here. This makes the marketplace available to third-party sellers, giving them a way to advertise, capture sales, and optionally utilize Amazon's warehouse and shipping services. Its large online store is powered by an Amazon Prime subscription, which provides additional benefits for members such as streaming entertainment and healthcare services (Amazon Clinic and Pharmacy).
Of course, the infrastructure that makes Amazon's web empire possible in the first place is all stitched together by AWS. It's difficult to completely separate AWS from e-commerce, given the blurred line between where one ends and the other begins.
That being said, e-commerce has probably been an underappreciated business in recent years. In Q3 2023, various reportable segments recorded impressive growth, even as Amazon cut spending to focus on revenue. Third-party seller services revenue increased 20% year over year to $34 billion, advertising increased 26% to $12 billion, and subscriptions increased 14% to $10 billion.
After the latest earnings update, Amazon stock is now trading at about 25 times Wall Street analysts' free cash flow estimates for 2024, but if e-commerce continues to make such impressive progress. , free cash flow estimates will likely be higher. In a world that continues to be plagued by extreme uncertainty, Amazon remains a relatively safe haven for investors.
John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool's board of directors. Nicholas Rossolillo and his customers have positions at Amazon. The Motley Fool has positions in and recommends Amazon and Oracle. The Motley Fool has a disclosure policy.
