Amazon (NYSE: AMZN) released its earnings for the first quarter of 2023 yesterday. While the stock rose initially in post-markets it subsequently trended lower on fears of a slowdown in the company’s cloud division.
Amazon reported revenues of $127.4 billion in the quarter which was ahead of $124.5 billion that analysts were expecting. The company’s sales increased 9% YoY in the quarter and were ahead of the $121 billion-$126 billion that it forecast during the Q4 2022 earnings call.
Amazon posted better-than-expected revenues
Looking at the different business segments, the company’s North America segment posted revenues of $76.9 billion – up 11% as compared to the corresponding quarter last year. Its International segment’s sales however rose only 1% to $29.1 billion.
The segment suffered from adverse currency movements and in constant currency terms, its sales rose 10%.
AWS sales rose 16% YoY to $21.4 billion. It is the slowest pace of growth in the segment. Also, for the past three quarters, AWS revenue growth has fallen to new lows.
The company’s advertising business generated revenues of $9.5 billion which is ahead of the $9.1 billion that analysts expected. Revenues rose 21% YoY which looks encouraging given the slowdown in ad spending.
Amazon CEO Andy Jassy said, “Our Advertising business continues to deliver robust growth, largely due to our ongoing machine learning investments that help customers see relevant information when they engage with us, which in turn delivers unusually strong results for brands.”
AMZN’s earnings were better than its guidance
Amazon posted an operating income of $4.8 billion in the quarter which was ahead of the $3.7 billion in the corresponding quarter last year. The metric surpassed the company’s guidance of $0-$4 billion.
As has been the case for the last few quarters, AWS drove the company’s profits. The segment posted an operating income of $5.1 billion in the quarter. The metric however was lower than in the first quarter of 2022 when it generated an operating income of $6.5 billion.
The North America segment posted an operating income of $0.9 billion in the quarter – as compared to an operating loss of $1.6 billion in the corresponding quarter last year.
The International operations continued to post losses though and posted an operating loss of $1.2 billion in the quarter, slightly below the $1.3 billion in the corresponding quarter last year.
Tech companies are looking to cut costs amid slowing growth. Like fellow tech companies, Amazon is witnessing a severe growth slowdown and has announced 27,000 layoffs this year – which in absolute terms are the highest among FAANG peers.
The cost cuts have helped tech companies post better-than-expected earnings in the March quarter.
Amazon posted negative free cash flows
While Amazon has historically posted strong free cash flows, it burnt cash in 2021 and 2022. In the first quarter of 2023, its free cash flows were a negative $3.3 billion which was nonetheless much lower than the cash outflow of $18.6 billion in the corresponding quarter last year.
On the cloud business, Jassy said, “while our AWS business navigates companies spending more cautiously in this macro environment, we continue to prioritize building long-term customer relationships both by helping customers save money and enabling them to more easily leverage technologies like Large Language Models and Generative AI.”
Amazon talked about an “uncertain economy”
During the earnings call, Amazon CFO Brian Olsavsky said, “AWS sales and support teams continue to spend much of their time helping customers optimize AWS spend so they can weather this uncertain economy.”
He said, “As expected, customers continue to evaluate ways to optimize their cloud spending in response to these tough economic conditions in the first quarter.”
Olsavsky warned, “We are seeing these optimizations continue into the second quarter with April revenue growth rates about 500 basis points lower than what we saw in Q1.”
The company’s commentary on the cloud slowdown spooked investors and the stock pared gains after the initial spike.
AMZN provided Q2 guidance
Amazon expects its sales in the second quarter to be between $127 billion-$133 billion which would imply a YoY growth of 5-10%. The company forecast operating income between $0-$5.5 billion for the second quarter.
Amazon stock crashed in 2022
Amazon stock fell almost 50% last year and was the third worst-performing FAANG stock of the year. It was barely in the green in 2021 and underperformed the FAANG peers by a wide margin.
In 2021, Amazon looked set to become a $2 trillion company but last year, its market cap fell even below $1 trillion. It became the first company ever to lose $1 trillion in market cap. Apple too joined it on the dubious list after the stock crashed on the first trading day of 2023.
AMZN stock has meanwhile rebounded from the lows and the market cap has surpassed $1 trillion. It still however trades well below the 2021 highs.
Brokerages are bullish on AMZN stock
While most Wall Street analysts are bullish on the stock – and many brokerages list it as their best idea for 2023 – the company’s financial performance has failed to live up to expectations.
Especially worrying has been the cloud slowdown which has only been worsening with every quarter.
Along with slowing tech spending, Amazon’s cloud business is also battling increasing competition which is taking a toll on not only AWS revenues but also profits.