Amazon.com, Inc. (AMZN.US): Will the time for aggressive investment and rapid growth come to an end as profits are once again diminishing?

On February 7th, after the market closed, Amazon.com, Inc. (AMZN.US) announced its financial results for the fourth quarter of 2024. The overall performance had both bright spots and flaws, with impressive profits but slightly disappointing growth. The conservative guidance and rapidly increasing Capex were also issues. 1. The most closely watched segment in the market, AWS, reported a revenue growth rate of 18.9% year-on-year for the quarter, a slight slowdown of 0.2 percentage points compared to the previous quarter and 0.1 percentage point lower than analyst expectations. According to Dolphin Research, the market was expecting a growth rate of 20% or higher. Therefore, AWS's growth was clearly unsatisfactory. However, the other two major cloud services providers, Azure and GCP, also saw significant slowdowns in growth this quarter, falling short of market expectations. This reflects that the overall demand in the cloud services market, including traditional businesses, was not as strong as anticipated. Despite a strong demand for AI-related services, supply constraints hindered growth. Therefore, AWS falling short of expectations this time was not very surprising. It can even be said that in a "comparatively disappointing" environment, the gap between AWS and the other two major cloud service providers narrowed. Additionally, AWS's operating profit margin for the quarter was 36.9%, a significant decrease from the historical high of 38.1% in the previous quarter. This decline is believed to be partly due to the end of the bonus period from extended depreciation schedules, as well as increased investment in AI. However, the market had already anticipated a decline in profit margin, and the actual performance exceeded expectations with a profit margin of 35.1%. The actual operating profit was around $10.6 billion, higher than the expected $10.1 billion. However, with the continued rapid increase in Capex investments, it remains to be seen whether AWS's profit margin will continue to decrease in the future. 2. The revenue growth rate for the broad retail sector in this quarter was 9.1%, slightly slower than the previous quarter by 0.4 percentage points, in line with market expectations. In terms of regional performance, the growth rate of North American retail actually accelerated from 8.7% to 9.5%, which is consistent with high-frequency research data showing strong holiday consumption in the United States. However, the nominal growth rate of international retail business dropped significantly from 11.7% to 7.9% in this quarter, reflecting a decline of 3 percentage points in growth in international regions under a constant exchange rate. It is evident that the drag from international regions (likely mainly European regions) and the negative impact of exchange rates were the main reasons for the slightly weaker growth in the retail sector. At the structural level, 3P merchant service revenue decelerated by 1.3 percentage points quarter-on-quarter, performing slightly worse than expected by 1.1%; subscription service revenue growth decelerated by 1.2 percentage points; and the growth rate of advertising business revenue, a source of incremental revenue of interest to the market, also slightly decreased by 0.8 percentage points, falling short of market expectations by 0.3 percentage points. It is clear that apart from proprietary retail business, other segments in the industry generally showed a slowdown in growth and fell short of market expectations. Therefore, despite the total revenue of approximately $187.8 billion being slightly higher than the market's expectation by 0.3%, which appears good, segments like 3P services and high-margin businesses like advertising performed poorly, structurally indicating a relatively weak performance. 3. In this quarter, Amazon.com, Inc.'s profits still significantly exceeded expectations, with overall operating profits reaching $21.2 billion, far exceeding analyst expectations of $18.9 billion and the upper limit of the previous guidance of $20 billion. As far as we know, market expectations were for performance above $20 billion, so the actual performance exceeded expectations. The overall operating profit margin was 11%, a 0.3 percentage point increase quarter-on-quarter. The strong growth in the North American retail sector was the biggest contributor, achieving an operating profit of nearly $9.3 billion, exceeding market expectations by approximately $2 billion (equivalent to 27%). The operating profit margin reached 8%, an increase of 1.9 percentage points year-on-year, far exceeding expectations of 6.4%. For the international retail business, the operating profit margin this quarter declined by 0.6 percentage points to 3%, but still exceeded expectations of 2.8% without affecting the overall performance of the group. Exchange rate factors were likely one of the main reasons for the quarter-on-quarter decline in profit margins. 4. From the perspective of costs and expenses, the gross margin for this quarter was 47.3%, lower than the expected 48.2%. Negative impacts of exchange rates, Capex investment growth leading to increased depreciation, weaker growth in high-margin advertising and 3P businesses, all contributed to the decline in gross profit margin. However, cost control and efficiency improvement are still ongoing. From the perspective of revenue composition, all expense ratios decreased year-on-year, with an overall reduction of 1.7 percentage points. The improvement in operating efficiency completely offset the slight decrease in gross profit margin quarter-on-quarter, and as a result, overall profits remained strong. However, in this quarter, Amazon.com, Inc.'s Capex once again significantly increased by approximately $5 billion to $27.6 billion (as disclosed in the company's cash flow statement, with some discrepancies compared to the conference call, but generally similar), with a year-on-year growth rate continuing to rise to 95%. In terms of both absolute value of investment and growth rate, this is a new high. As disclosed in the conference call, the overall Capex expenditure for 2025 is expected to surpass $100 billion. 5. Regarding performance guidance for the next quarter, the company expects revenue in the range of $151 billion to $155.5 billion, significantly lower than the market's expectations of $158.8 billion. Profit-wise, the company expects operating profit to be between $14 billion and $18 billion, also lower than market expectations of $18.2 billion. Both the upper limits of revenue and profit guidance are below market expectations, indicating a soft outlook. However, given that the company tends to deliver results close to the upper end of its guidance, the degree of deviation from expectations is not very significant. Dolphin Research's view: Based on our understanding, Amazon.com, Inc. is currently one of the most consistently bullish stocks in the market, widely held by investors. The market's optimism towards Amazon.com, Inc. includes: 1) The growth of AI, which could accelerate AWS's growth; 2) In the retail sector, there is potential for profit margin improvement mainly due to fulfillment and operational efficiency; 3) With the launch of Prime Video, the company still has considerable growth potential in e-commerce advertising and more general brand advertising. This time, the performance fell short in the first point, but...AWS did not accelerate, it also experienced marginal slowdown. However, this is not surprising given the similarly weak performances of Azure and GCP.1. Regarding the second point, the continuing rapid increase in North American retail profit margins and the ongoing decline in fulfillment costs indicate that operational efficiency in the retail business is improving, leading to a continued trend of profit margin growth. Regarding the third point, the slightly lower-than-expected growth in advertising revenue has left the market somewhat disappointed with the anticipated growth direction. Therefore, among the three points mentioned above, two are relatively negative, and one is somewhat positive. In addition, the guidance for the next quarter seems weak, especially with the upper limit of the profit guidance being lower than market expectations. A similar situation occurred in the 2Q24 results, which led to a sharp drop in stock prices by about 9%. The concern at that time was that the trend of increasing profit margins in the retail sector might come to an end, or at least be temporarily halted. According to our calculations, with the profit guidance upper limit this time, it is implied that the profit margin of the retail business may decrease slightly compared to the previous quarter (of course, there are significant exchange rate factors dragging it down, as well as seasonal impacts), once again suggesting that the trend of increasing profit margins in the retail sector may (temporarily) come to an end. The rapidly rising Capex will also put pressure on the short to medium-term profit outlook, which is not something that short-term investors will like. Therefore, for Amazon.com, Inc., which is generally well-regarded by investors and has high expectations, the impact of this quarter's results is clearly relatively negative in the short term. Detailed analysis is as follows: 1. Growth not accelerating, profit margins declining, where will AWS go As AI is currently an undisputed market investment theme, the market places particular importance on the performance of AWS among the company's various businesses. This quarter, AWS's revenue growth rate was 18.9% year-on-year, slowing by about 0.2 percentage points compared to the previous quarter, and also lower than the sell-side expectations by 0.1 percentage points. However, according to Dolphin Research, the buy-side expectations are still for 20% or higher growth. Therefore, AWS's growth is clearly disappointing. However, the two other major cloud services, Azure and GCP, which previously announced their results, also saw significant slowdowns in growth this quarter, lagging behind market expectations, reflecting that the overall demand for cloud services was not as strong as expected. Therefore, AWS also falling short of expectations is not entirely surprising. While it did not show the anticipated acceleration in growth, relative to the other two, AWS's growth has narrowed. In terms of profit, AWS's operating profit margin for this quarter was 36.9%, a noticeable decline from the historical high of 38.1% in the previous quarter. We believe part of the reason is that the dividend period of increased depreciation allowance for this year has passed, and the impact of increased AI investment. The market had already anticipated a decline in profit margins, and the actual performance of 35.1% profit margin was better than expected. The actual operating profit was around $10.6 billion, higher than the expected $10.1 billion. However, with the recent rapid increase in Capex investments, it is worth paying attention to the management's outlook for future profit margins of AWS. 2. Overall performance appears decent, but structural quality is poor, with significant overseas drag The overall revenue growth of the general retail sector in this quarter was 9.1%, slightly slower than the previous quarter by 0.4 percentage points, but completely in line with market expectations. In terms of regional performance, the growth rate of retail in North America significantly accelerated from 8.7% to 9.5%, in line with the strong holiday consumption trends in the US as shown in high-frequency survey data. However, the nominal growth rate of international retail business in this quarter plummeted from 11.7% to 7.9%, even under constant exchange rates, the growth rate in international regions still decreased by 3 percentage points compared to the previous quarter. This indicates that the drag from international regions (possibly mainly Europe) and the negative impact of exchange rates are the main reasons for the slight weakening of the retail sector. Looking specifically at each segment of the business: 1) the self-operated retail business grew by 7.1% year-on-year, almost without a slowdown compared to the previous quarter, and was the only major segment with growth better than market expectations; 2) 3P merchant service revenue slowed by 1.3 percentage points, underperforming expectations by 1.1%; 3) Similarly, the growth of subscription service revenue slowed by 1.2 percentage points; and the growth of advertising revenue, which market attention is focused on as an incremental revenue source, also slightly decreased by 0.8 percentage points, underperforming market expectations by 0.3 percentage points. It is clear that apart from the self-operated retail business, other segmented businesses generally show a slowdown in growth and underperformance compared to market expectations. However, the profit margins of the performing self-operated retail business are quite low, while the high-profit businesses such as 3P services and advertising performed poorly. Therefore, although the total revenue of approximately $187.8 billion is slightly higher than the market's expectations of 0.3%, it appears to be good, but structurally unsatisfactory. 3. Overall profit continues to exceed expectations, with North America being the biggest contributor On the revenue front, due to the lackluster performance of AWS in cloud computing and the less-than-ideal structure of the general retail business, the profit margins are also not good. However, Amazon.com, Inc.'s profits this quarter still significantly exceeded expectations, with overall operating profits reaching $21.2 billion, far surpassing the sell-side expectations of $18.9 billion, and the previous guidance upper limit of $20 billion. From what we understand, the buy-side expectations were just above $20 billion, so the actual performance was even better. The overall operating profit margin was 11%, increasing by 0.3 percentage points compared to the previous quarter. Looking at the segments, as mentioned earlier, AWS's actual operating profit exceeded expectations by about $500 million, although the profit margin slightly declined, it was still better than expected. The strong-performing retail business in North America was the biggest contributor to the better-than-expected profits this quarter, achieving an operating profit of nearly $9.3 billion, surpassing market expectations by about $2 billion (equivalent to 27%). The operating profit margin reached 8%, a significant increase of 1.9 percentage points year-on-year, far exceeding the expected 6.4%. The performance of the international retail business, which was relatively weak, saw a decline in the operating profit margin to 3% this quarter, down by 0.6 percentage points from the previous quarter, but still good, above the expected 2.8%. While not strong, it did not drag down the overall profits of the group. Exchange rate factors are likely one of the main reasons for the quarter-on-quarter decrease in profit margins. 4. Efficiency improvement and cost control continue, Capex continues to rise sharply From the perspective of costs and expenses: 1) the gross margin for this quarter was 47.3%, lower than the expected 48.2%. Dolphin Research believes that negative exchange rate effects, Capex investment growth leading to increased depreciation, and the high-profit advertising and 3P businesses all contribute to this. The poor growth is also due to a decline in gross profit margin.However, from a cost perspective, cost control and efficiency improvement are still ongoing. From the perspective of the proportion of revenue, all expense ratios have decreased compared to the same period last year, with an overall decrease of 1.7 percentage points. Therefore, the improvement in operational efficiency has fully offset the slight decrease in gross profit margin on a month-on-month basis. However, it is also worth noting that in this quarter, Amazon.com, Inc.'s Capex increased significantly to approximately 27.6 billion from the previous quarter (this is based on the company's cash flow statement disclosure, which may have some discrepancies from the earnings call, but is generally similar), with a year-on-year growth rate reaching 95%. Both the absolute value of investment and the growth rate have reached new highs. Correspondingly, the company's amortization and depreciation for this quarter increased to 15.6 billion, with a year-on-year growth rate of 13%. This indicates that the high investment is starting to have an initial impact on profits, but it may not have reached its peak yet, and further attention is needed. This article is reprinted from the "Dolphin Research" public account, edited by GMTEight: Li Fo.