Amazon Beats Q1 Earnings Expectations but Cautions on Slowing Growth of AWS Unit

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Amazon Beats Q1 Earnings Expectations but Cautions on Slowing Growth of AWS Unit
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Amazon (AMZN) reported its first quarter earnings on Thursday, and the numbers were impressive. Net sales came in at $127.36 billion, beating analysts’ estimates of $124.7 billion, while EPS was 31 cents compared to an estimated 20 cents. Operating margin was 3.7%, surpassing the estimated 2.38%. The company also provided guidance for Q2 net sales, with estimates ranging from $127 billion to $133 billion, compared to an estimated $130.1 billion.

However, despite these impressive numbers, Amazon’s stock took a hit in extended trading due to cautious comments from CFO Brian Olsavsky regarding a slowdown in the company’s key Amazon Web Services (AWS) cloud unit. Olsavsky noted that customers are continuing to optimize their spending, leading to a slowdown in growth from the segment. AWS revenue grew 16% in Q1, down from an annual growth rate of 37% seen in the same quarter last year.

“We are seeing these optimizations continue into the second quarter with April revenue growth rates about 500 basis points lower than what we saw in Q1,” Olsavsky told analysts on the company’s earnings call.

Despite the caution, Amazon’s CEO Andy Jassy expressed satisfaction with the company’s performance, particularly in light of the uncertain economic climate. “There’s a lot to like about how our teams are delivering for customers, particularly amidst an uncertain economy,” Jassy said in the earnings statement.

Jassy also highlighted the company’s efforts to rein in costs, which have been a central focus over the last few months. The company announced plans to lay off a total of 27,000 employees in an effort to improve cost-to-serve in its fulfillment network. “Our Stores business is continuing to improve the cost to serve in our fulfillment network while increasing the speed with which we get products into the hands of customers (we expect to have our fastest Prime delivery speeds ever in 2023),” Jassy said.

In addition, the company’s Advertising business continued to deliver robust growth, largely due to ongoing machine learning investments. “Our Advertising business continues to deliver robust growth, largely due to our ongoing machine learning investments that help customers see relevant information when they engage with us, which in turn delivers unusually strong results for brands,” Jassy said.

During the earnings call, both Jassy and Olsavsky spoke about the cautious spending habits of customers, both in the e-commerce and AWS sides of the business. “We saw moderated spending on discretionary categories as well as shifts to lower-priced items and healthy demand in everyday essentials, such as consumables and beauty,” Olsavsky noted. Jassy added that in AWS, enterprises were continuing to be cautious in their spending in the uncertain climate. However, he noted that customers were looking for ways to save money, primarily through cost optimization rather than cost-cutting.

Despite the caution, there were several areas of growth for Amazon. In its North America retail operations, the company returned to profitability after operating at a loss of over $1.5 billion in the three months leading up to March 31, 2022. This year, the segment reported operating income of $898 million. Online store sales, which declined 1% year-over-year in Q1 2022, rose 3% in the first quarter of this year.

Overall, Amazon’s Q1 earnings were strong, but the cautious comments regarding AWS caused the stock to take a hit in extended trading. However, the company’s efforts to improve cost-to-serve and rein in costs, along with growth in other areas, provide reasons for optimism. As Jassy noted, the company is focused on building customer relationships and a business that will outlast all of us.

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Chinonso Dioha
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  1. Amazon.com Announces First Quarter Results. www.businesswire.com. Published April 27, 2023. Accessed April 28, 2023. https://www.businesswire.com/news/home/20230426005960/en/Amazon.com-Announces-First-Quarter-Results
  2. Amazon to cut 9,000 additional jobs, after laying off 18,000 in January. Yahoo News. Accessed April 28, 2023. https://news.yahoo.com/amazon-to-cut-9000-additional-jobs-after-laying-off-18000-in-january-150551180.html