We're raising our Amazon price target, betting light guidance proves conservative

Published Tue, Apr 30 20248:59 PM EDTUpdated Wed, May 1 202412:35 PM EDT

Amazon reported a strong first quarter after the closing bell Tuesday. Shares rose more than 1% following the release. The upside, however, was tempered by a lower-than-expected outlook. Revenue increased 13% year-over-year to $143.31 billion, beating expectations for $142.5 billion, according to estimates compiled by LSEG. Earnings per share based on generally accepted accounting principles (GAAP) increased to 98 cents, compared with 31 cents last year and the 83-cent estimate. Operating income also more than tripled to $15.3 billion, a quarterly record that significantly exceeded the $11.26 billion forecast and came in well above the high-end of management's previous guidance of $12 billion. Amazon Why we own it : Amazon may be widely known for online shopping, but its cloud business is the real breadwinner. Advertising is another fast-growing, high-margin business. Investment in robust e-commerce logistics infrastructure makes its online storefront the place to be as management works to aggressively decrease delivery times and reduce overall cost to serve. Prime leverages free shipping and video streaming with tons of other perks to keep users paying every month. Competitors : Walmart , Target , Microsoft and Alphabet Most recent buy : Aug. 23, 2023 Initiated : February 2018 Bottom line This was a great quarter from Amazon that, in our view, points to further upside ahead. The benefits of Amazon's cost control measures were on full display during the first three months of 2024 as operating expenses were lower than expected across the board — most notably, in fulfillment costs, which benefited from all the regionalization efforts. Both e-commerce and cloud were humming. While the outlook for the current (second) quarter was a bit light, we wouldn't be surprised to see it prove conservative when the actual results are reported over the summer. Two reasons come to mind: the rebound in demand for Amazon Web Services cloud and management's focus on further reducing the overall cost to serve its e-commerce customers. As a result, we're bumping our price target up to $200 per share from $190. But we're keeping our 2 rating on the stock, recognizing it's still a bit too hot near all-time highs set on April 11. AMZN YTD mountain Amazon YTD Quarterly commentary Last quarter, we proclaimed the "cloud is back." Amazon Web Services turned in another stellar performance in Q1. AWS sales are now a $100 billion annual run rate business. Quarterly profitability was also fantastic. Last week, Microsoft 's Azure and Alphabet 's Google Cloud numbers were strong. AWS cloud sales soared 17% to a better-than-expected $25.04 billion in the quarter. But the unit's operating profit margin was jaw-dropping — expanding over 13 percentage points, or 1,300 basis points, resulting in a nearly $2 billion boost to operating income versus expectations. However, management noted on the post-earnings conference call that Q1 is expected to be the low point of the year for capital expenditures. That's because the company plans to lean into the strong demand for generative AI and cloud computing — ramping up investments to support AWS infrastructure, which could pressure the AWS profit margin a bit. CEO Andy Jassy said that cost-cutting efforts from cloud customers are complete and that they are again leaning into investments. "We see considerable momentum on the AI front where we've accumulated a multibillion-dollar revenue run rate already," he added. Nonetheless, we think the investments make sense considering the opportunity in front of us. As gigantic as AWS already is, Jassy pointed out that 85%, if not more, of global IT spend is still on-premise "before you even calculate gen AI, most of which will be created over the next 10 to 20 years from scratch and on the cloud." So, we're just still just scratching the surface of what this business can become over time. In our Week Ahead preview commentary, we did call out North America e-commerce as a likely swing factor for operating income — and indeed, the segment shined in the first quarter. Sales in North America grew 12% to $86.34 billion, leading to a 455% rise in operating income to $4.98 billion thanks to a further reduction in the cost-to-serve, which led to improved operating leverage. While an International e-commerce sales increase of 10% to $31.94 billion missed estimates, the segment saw $903 million in operating income. Expectations had called for a $571 million loss following a $1.25 billion loss in the year-ago period. The first quarter saw the fastest delivery times to Prime customers ever, Jassy said on the call, as customers look to Amazon for more purchases in categories such as Everyday Essentials, increasing total spend and purchase frequency. Looking ahead, management noted they see plenty of work left to be done on reducing the cost-to-serve. As an example, Jassy cited, "work to increase the consolidation of units into fewer boxes. As we further optimize our network, we've seen an increase in the number of units delivered per box, an important driver for reducing our cost." Amazon's fast-growing advertising business grew 24% to a better-than-expected $11.8 billion in the first quarter. On the call, Jassy said, "Prime Video Ads, very early days, just launched a few months ago. it's off to a really good start." Last week, Club names Meta Platforms and Alphabet also saw improvements in their ad businesses. Guidance Amazon expects second-quarter net sales to be between $144 billion to $149 billion, growing 7% to 11% year over year. That's a miss compared to the $150.1 billion expected. However, thanks to disciplined cost management, operating income guidance is expected to come in much closer to the mark at $10 billion to $14 billion versus $12.73 billion expected. The midpoint of the sales and operating income estimates point to an operating margin target of 8.2%, which compares with an 8.5% estimate for the second quarter. It also represents a strong expansion versus the 5.7% in the second quarter of 2023. (Jim Cramer's Charitable Trust is long AMZN, MSFT, GOOGL. 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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Andy Jassy, CEO of Amazon, speaks with CNBC's Andrew Ross Sorkin (not pictured) on April 11th, 2024.

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Amazon reported a strong first quarter after the closing bell Tuesday. Shares rose more than 1% following the release. The upside, however, was tempered by a lower-than-expected outlook.