Amazon Earnings: E-Commerce and Advertising Drive Good Quarter While AWS Decelerates Further

Amazon Stock at a Glance

• Fair Value Estimate: $137.00
• Morningstar Rating: 4 stars
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Wide

Amazon Earnings Update

Wide-moat Amazon AMZN reported good first-quarter results and provided guidance for the second quarter that was better than we were anticipating. E-commerce was solid and advertising was resilient, and we applaud the operational improvements that drove higher margins, while on the downside, Amazon Web Services continues to decelerate.

We still envision healthy long-term growth driven by e-commerce proliferation, AWS, and advertising even as the near term remains a bit of a work in progress. Further, macroeconomic issues are sending mixed signals, with pressure in the U.S. and improving conditions in Europe. We are maintaining our fair value estimate of $137 per share and still view shares as attractive.

First-quarter revenue grew 9% year over year as reported, or 11% in constant currency, to $127.4 billion, compared with the high end of guidance at $126 billion. Relative to our model, third-party seller services, or 3P, drove the bulk of the upside, with subscriptions and advertising also contributing to good results, while other segments were in line.

From a retail perspective (all year over year, as reported), revenue from online stores was flat, physical stores grew 7%, 3P grew 18%, and subscription services increased 15%. Paid unit growth was solid at 8%, which is consistent with last quarter.

Amazon’s Ad Revenue Growth Impresses

The two most critical segments, AWS and advertising, grew 16% and 21% as reported, respectively, over the year-ago period. We are impressed that Amazon’s advertising revenue growth meaningfully outpaced internet advertising giants Meta and Alphabet. AWS was our biggest concern this quarter, as customer optimization efforts led to revenue growth deceleration, a trend that is still ongoing as the offering saw growth of only 11% in the month of April.

On the bright side, Microsoft is seeing the same trend, and both companies expect these efforts to ease beginning around midyear. Management remains rightfully upbeat on AWS and is continuing to invest heavily in the segment.