We are boosting our Amazon (AMZN) price target to $240 from $220 following the company’s September quarter results that topped revenue, EPS and operating margin expectations and indications that the trend should continue.
The report also confirmed that the company is participating in AI adoption. While some will focus on the 19% year-over-year revenue gain in Amazon Web Services (AWS), we are far more pleased with the segment’s 38% operating margin achieved in the September quarter, which is well ahead of the 30.5% figure in the year-ago quarter and 35.5% in the June 2024 one. Much like our comments for Meta (META) , this argues that Amazon can easily handle its investment spending on its technology infrastructure and AWS while still driving bottom-line improvement. That bodes very well for this continued profitable growth as AI adoption in the enterprise continues.
Helping the company achieve that, its higher-margin advertising business passed the $14 billion mark in the quarter, placing it around 10% of overall revenue. We see more room for that business to run as Amazon continues to monetize its various digital platforms, including Prime Video. The sometimes-overlooked subscription services business also continued to grow in the low double digits, placing it above $11 billion for the first time in the September quarter. We like the sticky nature of subscription businesses and the predictability they tend to bring.
While there are issues with the October Employment Report, other job creation and wage indicators suggest we could see a favorable holiday shopping season. We continue to see Amazon benefitting as shoppers remain selective and utilize digital shopping as well as Amazon’s best-in-class logistics. Cost cuts over the last several quarters have led to margin improvements in the North America business but have also propelled the international one to become an operating income contributor. We should see greater operating leverage from both segments in the current quarter, one that has traditionally been the seasonally strongest for both.
Based on the company’s guidance for $181.5 billion to $188.5 billion in revenue for the current quarter, up 7% to 11% year over year, it sees operating income in the range of $16 billion to $20 billion. Some quick math puts the quarter’s operating margin between 9% and 11% compared to 11% in the September quarter. Our take is that view is likely conservative. Looking ahead, the benefit of continued cost efficiencies in its fulfillment network and the mix shift toward the higher margin AWS and advertising businesses bode extremely well for higher margins and profit dollars next year compared to this year.
Connecting Amazon’s Comments, Boosting Our Marvell Price Target
During Amazon’s earnings call, it mentioned the second version of its AI chipset, Trianium2, will start to ramp up in the next few weeks and it should be “very compelling for customers on price performance.” Amazon shared that this is leading to “significant interest” in these chips, and it has to go back to its manufacturing partner to produce “much more” than we originally planned.
We’ve discussed before how Marvell (MRVL) is a proprietary chip partner for Amazon as well as Meta and Microsoft (MSFT) . Given the constraints we’ve heard more about amid robust AI adoption, we’re not surprised by Amazon’s comments, which we find very supportive of our thesis behind MRVL shares. Recent weeks have also brought more support for a rebound in Marvell’s non-data center and AI efforts. That combination is leading us to lift our MRVL price target to $105 from $95, which even after Friday's share price pop gives us enough upside to keep our One rating intact.
As we make that adjustment, we’ll continue to watch the overall position size of MRVL shares in the overall Portfolio. Should they cross the 4.5% level following Taiwan Semi’s (TSM) October revenue report or when Marvell reports its quarterly results, we would be inclined to conduct some prudent portfolio management. Such a move would lock in another slice of highly-profitable gains.
At the time of publication, TheStreet Pro Portfolio was long AMZN, META, MRVL and MSFT.