Despite a solid first quarter, Amazon must do more to rein in costs to grow in 2023

Published Thu, Apr 27 20237:47 PM EDT

Amazon (AMZN) on Thursday extended a string of first-quarter earnings beats from mega-cap tech companies, even as caution around its cloud operations weighed on shares in late trading — making clear the ecommerce firm needs to further streamline operations to maintain growth in a slowing economy. Revenue increased 9.4% year-over-year, to $127.36 billion, beating analysts' expectations for $124.55 billion, according to estimates compiled by Refinitiv. Earnings-per-share (EPS) on the basis of generally accepted accounting principles, or GAAP, increased to 31 cents, compared with a loss of 38 cents per share last year. Operating income increased 30% on annual basis, to $4.77 billion, significantly exceeding analysts' forecasts of $3.08 billion, according to FactSet. Notably, the EPS figure included a pre-tax valuation loss of $500 million related to Amazon's investment in Rivian Automotive (RIVN), while the figure from the same period a year prior included a loss of $7.6 billion. Due to its significant stake in the electric vehicle maker, Amazon is required to record changes in Rivian's fortunes as non-operating income when there are gains, or as an expense when there are declines, as was the case in the first quarter of this year and that of 2022. Given that analysts don't include Rivian's swings in their estimates, the consensus forecast for EPS of 21 cents does not offer an accurate comparison. As a result, the operating income estimate is a more telling metric on how Amazon fared relative to Wall Street's expectations. Bottom line Club holding Amazon delivered a strong first quarter despite growing economic uncertainty. But the stock is struggling to get any credit for it in afterhours trading, a result of a large slowdown in growth this month at cloud division Amazon Web Services (AWS), one of the company's big profit engines. While it's disappointing to see the stock down about 2.5% on the news — overshadowing Amazon's relative resilience and the steps management has taken to restore margins — the decline is more bearable when factoring in the stock's jump in the run up to the earnings results. Over the past two trading sessions, Amazon stock saw a 7% rally, as the market extrapolated the strength of Club names Microsoft (MSFT), Alphabet (GOOGL) and Meta Platforms (META) in anticipation of strong numbers from the e-commerce giant. The numbers delivered, but without a guidance raise for second-quarter operating income, the stock is likely to continue to give up recent gains in Friday trading. Taken together, Amazon must do more to rein in costs in a slow-growth environment. Progress has been made, but there is more work to be done. We remain patient investors on the expectation that management will find religion. First-quarter results Amazon's results were strong across the board, with revenue beats in every reporting segment. Retail was a beat and about flat year-over-year, despite customers spending less on discretionary items. And higher-margin divisions like advertising, subscription services, and third-party services all grew by double-digit percentages . But the focus Thursday on the post-earnings conference call was on the dynamics at play within AWS. Roughly 16% year-on-year revenue growth from AWS came in ahead of the consensus estimate. Operating income, however, was disappointing, as margins contracted to 24% and missed analysts' forecasts of 25.2%. But what spooked the market during the conference call — causing Amazon to lose all initial post-market gains — was management's update about the current month. Executives said enterprise customers are optimizing spending in the cloud, creating a continued headwind to growth. That resulted in April's revenue growth coming in about 500 basis points below levels seen in the first quarter. If that trend continues throughout the summer, we could ultimately see Amazon's cloud business growing by a disappointing high single-digit percentage. Still, management remains steadfast in their belief that AWS has plenty of growth ahead, noting that more than 90% of global IT spend is for on-premise software and a large portion of that is expected to move to the cloud. Amazon ended the quarter with 1.47 million full-time and part-time employees, down 10% year-over-year and about 5% lower from the end of the fourth quarter. We reiterate that Amazon must do more to bring down its cost structure — either through additional layoffs or reduced spending — to improve profit margins. At the least, management acknowledged Thursday that there is likely more work to do. "We've obviously taken a hard look at all of our businesses that we're in over the last six-to-nine months and have made adjustments there. But there's still a lot ahead of us, especially on the operational side," CFO Brian Olsavsky explained. CEO Andy Jassy added: "I think every business is working really hard on finding ways to be more efficient. And...I think we're making really, really good progress on the fulfillment costs in our operations network and our stores business." Amazon had previously announced plans to cut 27,000 jobs . Second quarter outlook After a better-than-expected first quarter, the company's view of the current quarter was more mixed. Management expects second-quarter net sales to be between $127 billion and $133 billion, representing growth of about 5% to 10% year-over-year. The $130 billion midpoint of that range edged out analysts' forecasts of about $129.87 billion. However, Amazon expects second-quarter operating income to be in a range of $2 billion to $5.5 billion, with the midpoint of $3.75 billion falling short of the $4.43 billion predicted by analysts. Still, Amazon management is historically conservative with their guidance, and investors should find relief in the fact that Amazon is on track for a much more profitable year than the last one. The stock has climbed more than 30% year-to-date. (Jim Cramer's Charitable Trust is long AMZN, MSFT, GOOGL, META. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. 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Packages move along a conveyor at an Amazon fulfillment center on Cyber Monday in Robbinsville, New Jersey, on Nov. 29, 2021.

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