Earnings reports and strategies for Amazon performance in October 2024: How to assess? Focus on fundamentals, growth points, and free cash flow.

Among the tech giants in the US market, there may be only one that can achieve a recognized leading position in two major industries. $Amazon(AMZN.US)$ As the dual dominant force in the e-commerce sector and cloud computing industry, Amazon's financial performance has always been highly anticipated.

After the US stock market closed on October 31, Amazon will release its latest financial report. Every time the company releases its performance, it may also signify a good trading or investment opportunity. Prior to this, investors need to understand how to interpret its performance.

How should we analyze Amazon's performance? What are the key points to focus on? We mainly look at 3 key aspects: retail business fundamentals, cloud business, and free cash flow.

1. Fundamentals: Retail Business

The first impression people have of Amazon might be as an e-commerce giant. In addition to its e-commerce business, Amazon has also developed offline retail business, third-party seller services, membership subscriptions, e-commerce advertising, and other businesses. These can all be classified as Amazon's retail business, or its fundamental base.

For the retail business, the main focus is on its revenue growth rate and profit margin level. In terms of revenue, due to factors such as the impact of the pandemic and macroeconomic fluctuations, Amazon's retail business revenue has fluctuated greatly in the past two to three years. From 2020 to the first half of 2021, the pandemic stimulated online shopping demand, coupled with the loose monetary policy of the Federal Reserve driving macroeconomic growth, Amazon's highest quarterly growth rate in the retail sector even exceeded 40%.

However, starting from the second half of 2021, as the impact of the pandemic began to wane, coupled with the economic growth expectations declining due to the Fed's interest rate hikes, and the fact that revenue was at a high level before, Amazon's retail business revenue growth rate began to experience a precipitous decline.

By the first half of 2023, the US economic growth is expected to turn around again, combined with the relatively low revenue base from before, Amazon's retail revenue is beginning to bounce back, returning to double-digit growth in 2023Q2. In 2024Q2, Amazon's retail revenue is approximately $121.7 billion, an 8.4% year-on-year increase, with growth rates declining for two consecutive quarters. Looking ahead to the upcoming 2024 fiscal year Q3 earnings report, we need to focus on whether Amazon's retail revenue growth rate can rebound.

From a profit margin perspective, the operational profit margin trend of Amazon's retail business is basically consistent with the revenue growth trend. From the first half of 2020 to the first half of 2021, the operational profit margin of the North American retail business once exceeded 5%, while the international retail business was profitable. Starting from the third quarter of 2021, as revenue growth rates began to significantly decline, economies of scale weakened, and intensified competition from new entrants like TicTok and Temu, causing internal competition in the industry, Amazon's retail business operation profit margin straight declined, with even North American operations incurring losses.

By 2023, with the expected economic recovery and Amazon's cost-cutting measures such as layoffs and streamlining beginning to take effect, Amazon's operational profit margin is starting to bounce back. In 2024Q2, the North American retail business profit margin is 5.6%, showing a slight decline, while the international retail business profit margin is 0.9%, after achieving a turnaround from losses to gains in the previous quarter, the profitability did not further improve, which may be an important reason for the short-term decline in Amazon's stock price after the earnings report.

For the latest fiscal quarter, we can continue to focus on whether Amazon's retail business revenue growth rate can return to a rebound trend, and whether the operational profit margin of the retail business can improve after a short-term decline.

2. Growth Point: AWS Cloud Business

Amazon has been focusing on cloud computing since 2006, with AWS cloud business revenue accounting for over 15% of total revenue, becoming a core growth point and main source of profit for Amazon in recent years. For AWS cloud business, we mainly focus on two points.

First is its revenue growth rate and operational profit margin. Starting from the first half of 2022, influenced by the reduction in IT spending by enterprises, Amazon's cloud business revenue growth rate began to continuously decline, from close to 40% quarterly year-on-year growth rate to just over 10%. Its operational profit margin also dropped from above 30% to approximately 24% in 2023Q1. However, in the 2023Q3-2024Q2 fiscal quarters, Amazon's cloud business revenue growth rate saw consecutive rebounds, and the operational profit margin rose to over 35%, reaching a new high in recent years.

For future fiscal quarters, we need to monitor whether Amazon's cloud business revenue growth rate can continue its rebound, and whether the operational profit margin can be maintained at a higher level.

Next, we can pay attention to the market share changes of Amazon's cloud computing business. Amazon is the leader in the cloud computing industry, holding over 30% market share. Slowing growth is a common phenomenon in the industry, and Amazon as the industry leader cannot avoid it, as it is within market expectations. Although enterprise IT spending has cyclical variations, the shift from traditional IT spending to cloud computing may be the trend. Therefore, the short-term growth fluctuations in the cloud computing industry may not change its long-term growth logic.

Under this premise, we may need to focus more on whether Amazon can maintain its leading market share, thereby consolidating its leading position and competitive advantage.

We see that among the players in the cloud computing industry with a market share of over 10%, Microsoft Azure and Google Cloud have shown similar quarterly growth rates over the past two years, both significantly surpassing the growth rate of Amazon AWS. This means that while Amazon temporarily maintains a leading market share in the cloud computing industry, its leading position may be challenged due to its main competitors running faster. In the future, we still need to focus on the growth and market share changes of the top players in the industry, to see if Amazon can reverse the relative growth lag.

3. Long-term foundation of stock price: Free Cash Flow

Compared to tech giants like Apple, Microsoft, and Google, Amazon was in a loss-making state for a long time until achieving massive profits in the billions of dollars in 2018. At the same time, Amazon rarely engages in operations such as stock buybacks and dividends to reward shareholders. However, these shortcomings do not affect Amazon's historical long-term stock price increase, as it has joined the ranks of trillion-dollar market cap giants. The important reason behind this may be Amazon's long-term high growth rate and strong free cash flow.

In particular, Amazon's free cash flow may be the key factor that allows the market to overlook its perennial losses and reach a market capitalization of over a trillion dollars. Because in some widely accepted valuation models in the market, enterprise value is the discounted present value of its future cash flows. In the Futubull app's cash flow statement, we can easily see the free cash flow data for each financial reporting period.

For example, in the ten-year period from 2011 to 2020, Amazon's net income was very unstable in the early years, but its free cash flow has always been positive, exceeding its net income data every year. The cumulative net income during this period is approximately $50 billion, while cumulative free cash flow approaches almost $100 billion.

However, starting from 2021, Amazon's free cash flow situation has deteriorated rapidly, with consecutive years of negative values exceeding tens of billions of dollars, which may also be an important reason why its stock price significantly underperformed other tech giants in 2021 and even experienced a sharp decline in 2022.

Amazon's free cash flow took a 180-degree turn, with a significant increase in capital expenditure being a key reason. Perhaps due to disruptions from TickTok and Temu, intensifying competition within the industry, or possibly Amazon feeling growth pressure itself, Amazon has increased investments in logistics infrastructure and other areas to enhance user experience and strengthen its competitive advantage. With substantial investments, Amazon's revenue did not continue its previous high growth, but instead its capital expenditures jumped from the previous billion level to over $50 billion, putting significant pressure on free cash flow.

The good news is that in 2023, Amazon's capital investment decreased relatively, leading to a substantial improvement in free cash flow, reaching over $30 billion. Therefore, for Amazon's future performance, we still need to monitor its capital expenditure and the improvement of free cash flow, as this is ultimately an important foundation for Amazon's long-term stock price logic.

Seeing this, you may have some new insights on how to interpret Amazon's performance. It is worth mentioning that each earnings release from many star companies may represent a rare trading opportunity for different types of investors.

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Conversely, if investors believe that the latest performance of a certain company will not be optimistic and will bring pressure on the short-term stock price, investors may consider short selling, which can be done by considering margin selling or buying put options.

Of course, if investors feel uncertain about the bullish or bearish direction of a company's performance, but the stock price may experience significant upward or downward volatility after the performance announcement, investors may consider capturing potential opportunities by trading the volatility of its stock price, considering employing a straddle strategy by purchasing both call and put options simultaneously.

Finally, to summarize,

Retail business is Amazon's foundation, and we need to focus on whether its revenue growth rate and operating profit margin can return to an improving trend.

AWS cloud business is amazon's core growth driver and source of profit, we need to pay attention to whether its revenue growth rate and profit margin can continue to stabilize and rebound.

Free cash flow is an important foundation of amazon's historical stock price long-term logic, we need to pay attention to whether its free cash flow can continue to improve in future quarters.

Every time a company releases its earnings, it may bring potential trading opportunities. Investors can consider suitable types of trades based on their individual risk tolerance.