Amazon Q1 results beat estimates with growth from advertising business

Amazon's first-quarter results for 2023 have beaten Wall Street expectations, with the company's income from cloud computing and advertising units outperforming predictions. 

The e-commerce giant reported revenues of $127.4 billion, a 9% increase from last year. Though the figures do not equate to the rapid growth Amazon was used to previously, it’s a signal to investors that the company is on track for a strong comeback. 

The news initially sent Amazon's shares soaring by over 10%, but caution regarding the slowdown in its key Amazon Web Services (AWS) cloud unit saw the stock reverse, forfeiting all gains in extended trading. Revenue surge in Amazon's AWS unit clocked 16% during Q1, down from an annual growth rate of 37% in the same quarter last year, but still better than the Street's expectation of 15%.

CFO Brian Olsavsky told investors on the company's earnings call AWS customers are continuing "optimisations" in their spending. He also cited caution about a possible growth slowdown in the segment, spooking investors. As a result, shares were down about 2% at the time of closing. 

“There’s a lot to like about how our teams are delivering for customers, particularly amidst an uncertain economy,” said chief executive officer Andy Jassy in a statement.

The CEO also cited machine learning investments driving growth in Amazon’s ad business, which saw revenue jump 23% to $9.51 billion, beating the $9.05 billion expected.

"We continue to prioritise building long-term customer relationships by helping customers save money and enabling them to leverage technologies like Large Language Models and generative AI more easily," explained Jassy. 

Cost cutting amid uncertain macro backdrop

With concerns over rising interest rates and inflation still paramount in the US and a threat to consumer spending, Amazon has been implementing aggressive job cuts, with around 9,000 corporate employees set to lose their jobs by the end of the month.  

The company had already cut around 18,000 workers in earlier layoffs, with affected units including AWS, advertising, streaming-unit Twitch, and other areas. In addition, they've been targeting unprofitable divisions, such as its devices business, and shutting down specific projects. 

In the investor call, CEO Jassy acknowledged the company's challenges noting that shoppers have become more conscious about spending and are trying to save costs when possible.  

Many shoppers have also returned to in-store shopping after relying on e-commerce during the pandemic. This has led to no growth in the company's online retail business. Sales for Amazon's online stores segment have been decreasing, with the company reporting that its online store sales were roughly flat for the first quarter compared with the period a year ago. 

However, Jassy remained optimistic, stating that the company's retail business continues improving the cost to serve in their fulfillment network while increasing the speed with which they get products into customers' hands.  

In addition, Amazon's cloud computing business, AWS, has been navigating companies spending more cautiously in this macro environment. However, Jassy believes that there is much growth ahead for AWS and that the company prioritises building long-term customer relationships. 

Despite challenges, comeback is underway

Insider Intelligence principal analyst Andrew Lipsman told Campaign that Amazon might finally have a bit of wind at its back.  

He said: "Amazon did what it needed to do in Q1 by reversing--or at least stalling--its most troublesome declining growth trends. Moreover, Amazon's stronger-than-expected performance for its key profit centres of AWS and advertising indicates that the enterprise and the digital ad sectors may be turning the corner." 

Despite the challenges, Amazon's worldwide e-commerce sales are expected to grow by nearly 9% to $685.39 billion by the end of 2023, giving the company an 11.6% share of the global e-commerce market. 

Marketplace accounts for 65.9% of Amazon's ecommerce sales, with that share growing, while direct accounts for 34.1% of Amazon's e-commerce sales, with that share declining. 

Amazon's global ad business is also expected to grow by nearly 19% this year to reach $44.88 billion, giving Amazon a 7.5% share of the global digital ad market. In 2023, 44.4% of Amazon's worldwide ad business will come from mobile. 

Despite Amazon's challenges, it is expected to grow its Prime membership by more than 11% this year to 287.4 million worldwide. There will be 93.0 million Prime households in the US, up 3.1% over 2022.