Amazon (NASDAQ:AMZN) unveiled its Q3 financial performance yesterday, resulting in a significant boost in its stock price, with a more than 7% increase, as investors react favorably to the company’s better-than-expected earnings and revenue. Below are the key highlights from the report, illustrating why Amazon remains an attractive investment opportunity.
In the third quarter, Amazon reported total revenues of $143.1 billion, a notable 13% increase compared to the same period last year, surpassing analysts’ expectations of $141.4 billion. Additionally, these revenues slightly exceeded Amazon’s own guidance range.
The enterprise-focused Amazon Web Services (AWS) division also saw revenue growth, with a 12% increase to $23.1 billion. While this marks the slowest pace since disclosing AWS revenues separately, it still slightly trailed analysts’ estimates. Notably, among Amazon’s cloud competitors, Alphabet’s recent cloud revenues disappointed the market, while Microsoft’s cloud business demonstrated impressive quarterly performance.
Amazon’s advertising segment displayed robust performance, with a 26% increase in revenues to $12.1 billion, surpassing Street expectations. However, Amazon’s Q4 revenue guidance of $160 billion to $167 billion fell within a range below what the Street had anticipated.
Record Q3 Profits for Amazon
In the third quarter, Amazon achieved a record net profit of $9.9 billion, primarily due to mark-to-market gains on its investment in the electric vehicle startup Rivian (RIVN), where it holds the largest share. However, it’s important to note that this net income figure could be subject to potential mark-to-market losses in Q4, given the current stock price of Rivian. On the other hand, Amazon reported a strong operating profit of $11.2 billion in Q4, providing a more reliable metric to evaluate its profitability.
Highlights from the Report
- Amazon’s operating margin reached 7.8%, marking its highest point since early 2021. The company’s cost-cutting initiatives have effectively bolstered profits, despite a slowdown in revenue growth.
- The International segment of Amazon approached breakeven on an operating profit basis in Q3.
- AWS reported an operating margin of 30.3%, the highest in seven quarters. This improvement is attributed to increased leverage on headcount costs.
- Over the trailing 12-month period, Amazon’s free cash flows have grown to $21.4 billion, a remarkable turnaround from the negative $19.7 billion reported at the end of Q3 2022.
Key Insights from Amazon’s Q3 Report
- Consumers remain cautious about spending, focusing on cost-saving measures and seeking deals, leading to lower discretionary spending.
- AWS’s growth appears to be stabilizing, with signs of a slowdown in new cost optimization efforts. Amazon’s CEO, Andy Jassy, emphasized that AWS’s absolute growth remains the highest in the industry.
- Amazon’s advertising business continues to thrive, with an annualized revenue run rate of nearly $50 billion, showing consistent YoY revenue growth of over 20%. Despite concerns in the advertising market, Amazon remains optimistic, especially regarding lower-funnel ad products like sponsored products.
Amazon Stock: A Compelling Investment
Despite its slower top-line growth, Amazon still presents an attractive investment opportunity. The company’s focus on cost-efficiency and improvements in its profitability should contribute to stronger bottom-line results and cash flow growth in the coming quarters. Additionally, AWS is expected to experience higher growth rates in 2024, and Amazon’s introduction of ads to Prime Video is poised to boost revenues and profitability. Prime Video, in particular, represents an underappreciated asset within Amazon’s portfolio, with significant potential for growth.
From a valuation perspective, Amazon’s next 12-month price-to-earnings multiple stands at 45x, which is considered reasonable. These factors collectively make Amazon stock an appealing choice at its current price levels.
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Author Faith Yakubu 
