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Amazon stock swings after a great quarter underscore our golden rule during earnings season

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6 months ago

October 27, 2023

Amazon (AMZN) reported better-than-expected third-quarter results after the closing bell Thursday. While concerns over the performance of the Amazon Web Services cloud unit wiped out initial stock gains, those concerns were quickly put to bed as the post-earnings conference call got underway and shares pushed higher again. Revenue for the three months ended Sept. 30 increased 13% year-over-year to $143.1 billion, beating expectations for $141.4 billion, according to estimates compiled by LSEG, formerly Refinitiv. Earnings-per-share on the basis of generally accepted accounting principles (GAAP) increased to 94 cents, compared with 28 cents per share last year. Operating income increased over 340% to $11.12 billion, significantly exceeding forecasts of $7.7 billion, according to FactSet, and above the high-end of management’s guidance. Notably, the EPS figure included a pre-tax valuation gain of $1.2 billion related to Amazon’s investment in Rivian Automotive (RIVN), while the figure from the same period a year prior included a pre-tax valuation gain of $1.1 billion. Due to its significant stake in the electric vehicle maker, Amazon is required to record changes in Rivian’s fortunes as non-operating income when there are gains or as an expense when there are declines. Given that analysts don’t include Rivian’s swings in their estimates, the consensus forecast for EPS at the time of the print did not offer an accurate comparison. As a result, the operating income estimate is a more telling metric on how Amazon fared relative to Wall Street’s expectations — and make no mistake, it was strong. Bottom line Shares of Amazon went on a rollercoaster ride right after the quarter was released: popping at first as investors got excited about the headline numbers and then dropping as they soured on the topline growth at AWS. But those knee-jerk sellers that got out before the call started proved to be wrong as CEO Andy Jassy noted that several large deals were signed during the quarter that were not reflected in Thursday’s results. Management said cost optimization remains a headwind but its impact is “meaningfully attenuating,” as the “pace and volume of closed deals pickup”. Now that’s good. But the kicker was a more quantitative comment: “We signed several new deals in September with an effective date in October that won’t show up in any GAAP reported number for Q3, but the collection of which is higher than our total reported deal volume for all of Q3.” Though we can’t put an exact number on it, we think it’s more than reasonable to assume that if that activity had been included in the Q3 results we would have seen an AWS growth rate above what the Street was looking for. That one comment turned the stock completely around and again demonstrated the importance of waiting to hear from management before selling (or buying for that matter) on a single line item — especially since the AWS issue wasn’t all that bad to begin with. It was only a $145 million miss on more than $23 billion in revenue. AMZN YTD mountain Amazon YTD Aside from that, we would call out the immense operating leverage management is regaining thanks to cost cuts. On a 13% annual increase in sales, we got a monster 340% increase in operating income versus the year-ago period as operating expenses only increased by 6% year over year. That resulted in a greater than 580-basis-point expansion in Amazon’s operating margin. Also aiding the results on both sides of the profit and loss statement is Amazon’s ongoing effort to regionalize its fulfillment network. Not only is stocking items closer to their final destination helping on cost, but the faster delivery times, as a result, are boosting demand. Jassy explained on the call, “When you deliver faster delivery to customers they actually start to consider you for a lot more items than they otherwise would.” He added, “When you’re consistently getting something same day or next day it just changes what you’re willing to do.” All in, it was a strong third-quarter report with worries over AWS dismissed. Fourth-quarter sales guidance was a bit short. But the operating guide outpaced expectations. Against that backdrop, we’re reiterating 1 rating on the stock and our $160-per-share price target. Quarterly commentary While Q3 was strong, the razor-thin miss that had everyone concerned prior to the conference call was on AWS. As seen in the Segments part of the table above, AWS delivered revenue of $23.06 billion versus $23.20 billion expected, which was 12.3% higher than the year-ago period. Wall Street was hoping for 13% growth. But as we learned on the call, the reported number didn’t reveal the full picture and things are clearly improving in the fourth quarter as optimization efforts begin to wind down. In the Companywide part of the table, the cost of sales line-item came in above expectations at $75 billion. But, that’s easily explained away by the sales beat because cost of sales as a percentage of revenue was actually less than what the Street was expecting. So, it’s a miss because it’s higher than expected but really a beat when you adjust for the sales performance. Cash flow was a tad light but nothing we would be concerned about considering it increased 86% year over year, and free cash flow of $9.92 billion edged out net income. As we can see above, the Regions were all better than expected, with North American profits better than expected and International losses way less than expected. Guidance Despite missing on the top line, as we noted earlier in the Bottom Line, we should continue to see the benefits of cost optimization and management’s operating income forecast for Q4 that came in above expectations The company said it expects net sales to grow between 7% and 12% year over year — in a range of $160 billion to $167 billion in the fourth quarter. The midpoint of $163.5 billion is short of analysts’ estimates of about $166.4 billion. However, thanks to increased operating leverage on the back of cost cuts, management’s operating income guide of between $7 billion and $11 billion, which was ahead of the $8.5 billion the Street was looking for, at the $9 billion midpoint. (Jim Cramer’s Charitable Trust is long AMZN. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

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Source: CNBC

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