Now that 2024 is just a few days away, it’s opportune to reflect on the financial journey of Amazon (NASDAQ: AMZN) throughout this past year.
In a landscape dominated by technological advancements and burgeoning e-commerce, Amazon.com, Inc. remains a standout player among US stocks.
The company’s diverse operations extend far beyond its roots as an online store, encompassing vital segments like the ever-expansive Amazon Web Services, currently holding the title of the world’s largest cloud operation.
The prowess of Amazon stock extends beyond the realms of e-commerce, dabbling into many sectors simultaneously.
However, e-commerce, its primary domain, has faced profitability fluctuations, intricately tied to its capital-intensive nature, driven by Amazon’s extensive delivery network employing thousands of drivers, striving for the ambitious goal of delivering parcels in under two days.
Join us as we delve into the heart of Amazon stock performance in 2023, deciphering the forces that shaped its trajectory in this dynamic marketplace.
Quarter 3 Results
In the third quarter of 2023, the financial landscape of Amazon stock unfolded with notable shifts. The earnings release comes as a notable milestone on the company’s earnings calendar.
The highlights of these are displayed below:
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Segment Growth
- 3P revenue surged by nearly 20%, ads by 25%, subscription mid-teens, and 1P in the mid-double digits.
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Fulfillment Network Overhaul
- Transitioned from a single national to eight regional networks, exceeding expectations in impact and smoothness.
- Accelerated delivery speed improved customer satisfaction and unlocked demand, particularly in consumables.
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Cost Efficiency
- Shipping+fulfillment costs as a percentage of GMV reduced from 26.1% in 1Q’22 to 22.7% in 3Q’23.
- Optimistic outlook suggests ongoing improvements, driven by investments in robotics.
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Operational Leverage
- Historical trend reversal: Shipping+fulfillment cost growth now at par with unit growth.
- Sustained improvement could translate into significant profit gains, with every 100 basis points improvement contributing around $8 billion.
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AWS Performance
- YoY growth at 12%, with the highest QoQ incremental revenue in the last five quarters.
- Operating margin rebounded to approximately 30%, citing “increased leverage on headcount costs.”
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Generative AI and Customer Engagement
- Emphasis on managing cost optimization in AWS amid generative AI’s rapid growth.
- Customer engagement evolving, with a shift towards longer-term commitments, termed as savings plans.
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Overall Cost Structure
- Broader Amazon ecosystem, including Alexa and other ventures, showing signs of efficiency in the cost structure.
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Future Outlook
- Focus on retail segment’s operational efficiency and AWS’s margin dynamics deemed pivotal for investors in the coming years.
2023 Capital Allocation Strategy
Amazon’s capital allocation strategy in 2023 reflects a deliberate focus on long-term growth and customer-centric initiatives.
Despite a temporary dip in Return on Invested Capital (ROIC) due to substantial investments in AWS infrastructure and the U.S. fulfillment network expansion, the strategic moves of Amazon stock are proving effective.
The expansion of the fulfillment network across 8 regions enhances efficiency by reducing distances, lowering costs, and shortening delivery times. This not only reinforces Amazon’s competitive edge but also compels competitors to invest in order to match Amazon’s service standards.
The emphasis on customer loyalty through Amazon Prime, akin to the Costco model, fosters a vast ecosystem with services like Prime Video, resulting in repeat purchases and heightened customer allegiance.
Notably, the collaboration with Shopify streamlines the purchasing process, contributing to increased business. Amazon’s substantial investments in Research and Development (R&D) are viewed positively, particularly when coupled with a robust ROIC.
Despite a current ROIC-WACC spread of 1% to 2%, the potential return to a 20% ROIC could yield an impressive 12% to 13% spread, reaffirming Amazon’s commitment to shareholder value creation through strategic capital allocation.
Margin Improvement
In Q3 2023, Amazon’s margin demonstrated resilience and growth, propelled by operational efficiency and prudent cost-saving measures.
The strategic regionalization of national fulfillment centers played a pivotal role, reducing delivery miles and mitigating FX challenges and elevated investment costs. Notably, Q2 23 witnessed headcount reductions and restrained hiring, fostering margin recovery in the AWS segment.
The Q3 report unveiled a substantial 580 basis points year-over-year surge in the operating margin, reaching an impressive 7.8%. Within this, the AWS segment’s operating margin notably climbed by 390 basis points to 30.3%. Looking ahead, prospects for sustained margin expansion appear promising.
The AWS segment, with its superior margins, is anticipated to spearhead growth, complemented by a potential uptick in AWS growth as indicated in revenue analysis.
The ongoing initiative of Amazon stock to regionalize fulfillment centers, optimizing inventory placement and enhancing inbound processes, is a cornerstone of a protracted cost-saving strategy.
As this multi-year initiative unfolds, it is expected to yield incremental savings. Analysts hold an optimistic outlook on Amazon’s margin trajectory, buoyed by the robust performance in Q3 and the continued pursuit of efficiency-enhancing measures in both the AWS and retail segments.
Final Takeaway
Amazon stock in 2023 demonstrated resilience with Q3 financial highlights, including strong segment growth, a strategic fulfillment network overhaul, and improved cost efficiency. AWS’s solid performance, generative AI, and customer engagement efforts contributed to its success.
The capital allocation strategy focused on long-term growth, and margin improvement in Q3 showcased operational efficiency. Amazon’s diverse operations and strategic initiatives position it well for continued success in the dynamic marketplace of 2023.
