We're Hiking Our Price Target on a Leaner and More Profitable Amazon
While Amazon's overall revenue rose year over year, its operating profit was multiples higher.
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* We are boosting our price target for One rated Amazon shares to $200 from $180.
* Amazon's December quarter topped expectations, but it was the profit performance that caught our attention.
* While Amazon will boost its capital spending for AWS, AI, and large language models, management sees more cost-reduction opportunities
Action Alerts PLUS holding Amazon AMZN topped consensus expectations for its December quarter with its bottom line aided by stronger-than-expected operating income and a pick-up in Amazon Web Services (AWS) revenues.
The quarter's performance confirms management's efforts over the last several quarters to wring cost out of the business are paying off as evidenced by the 7.8% operating margin achieved in the December quarter compared to 6.4% for all of 2023 and 2.4% for 2022. Said another way, while Amazon's overall revenue rose 14% year over year in the December quarter, its operating profit was multiples higher.
Even though Amazon expects to boost its capital spending compared to the $484 billion spent in 2023 as it continues to invest in AWS, generative AI, and large language models, management shared it isn't done driving costout of the business. This tells us we should see further margin improvement in the coming quarters, something that will be aided by the continued growth in its higher-margin businesses such as AWS and advertising.
We should also see cost reduction benefits take hold in the core digital shopping business as consumers continue to pivot more of their shopping, including grocery, to that over brick & mortar. Advertising sales across the company's platform were also strong, rising 26% to $14.65 billion, ~9% of total sales for the quarter, and we expect that higher margin to accelerate as the company weaves advertising across Prime Video and other parts of its platform.
Our response to this leaner, more profitable Amazon is to lift our price target to $200 from $180 and reiterate our One rating.
For the current quarter, Amazon sees revenue in the range of $138.0-$143.5 billion compared to the $142.01 billion consensus. While down sequentially compared to the $170 billion booked in its seasonally strongest quarter for digital shopping, the company's guidance translates to year-over-year top-line revenue growth of 8%-13%. In keeping with our thoughts above, the company's likely conservative operating profit forecast for the March quarter of $8-$12 billion is significantly higher than the $4.8 billion achieved in the March 2023 quarter.
We will continue to watch Amazon's AI efforts, not only in AWS but also in its digital shopping business. Alongside its earnings report last night, Amazon beta launched a new generative AI-powered shopping assistant. Dubbed "Rufus," the assistant is now available to a small subset of customers using the Amazon mobile app and will be rolled out to more customers in the U.S. in the coming weeks.
We will be looking to gauge reception to Rufus and should it boost average cart and transaction size it would be reason to think Amazon can take further share from brick & mortar retailers.
Action Alerts PLUS is long AMZN.