Great businesses that achieve long term success inevitably evolve. Some change the nature of their business completely, as Netflix (NFLX) did when they shifted from mail order VHS tapes to DVDs, then eventually to a streaming service. Most just add to the core businesses on which they were founded. Examples of that would be Alphabet (GOOG, GOOGL) and Meta (META), which started out as a search engine and social media platform, respectively, and have now diversified to the point where they felt that even their names should be changed. Google and Facebook are just parts of their businesses -- important parts for sure -- but they are by no means the be-all and end-all for those companies.
To some extent, the same can be said of Amazon (AMZN), which reported calendar Q3 earnings after the market closed yesterday. Remember, Amazon started as an online bookstore, then expanded to sell other things. However, no matter how many things you sell and how big may be your market share, there is a limit to growth for a retailer. Margins are skinny and consumers can be fickle, so once the online sales business grew to a certain point, Amazon began to diversify and eventually became the ubiquitous behemoth that we now know, with web and streaming services, and fingers in a whole bunch of different pies.
And yet, as we found out yesterday, Amazon’s fortunes do still depend largely on its core business and, more importantly, the market is once again accepting that. The stock is soaring this morning after a big beat on the bottom line, but it is the kind of beat that until quite recently may have just as well resulted in a selloff. AWS net sales disappointed and Q4 revenue guidance came in a bit lower than the Street was forecasting, both things that might have prompted weakness in the past regardless of the overall numbers.
Today, though, traders are focused on basic business metrics like margins and revenue growth achieved last quarter and, as I write, the stock is trading in the premarket more than seven percent above where it closed yesterday.
That is good for those who hold the stock, obviously, but does it have any implications going forward? Is this a one-off, or are these better than expected overall results repeatable?
What has recently been Amazon’s biggest area of growth, cloud services, were a bit disappointing last quarter, in large part it seems because they were a little late to the AI party. They grew revenue, but by less than anticipated. However, AMZN invested over a billion dollars in Anthropic, a competitor of OpenAI, last month. Prior to that, they seem to have fallen behind those whose cloud computing embracing the technology more aggressively, such as Microsoft (MSFT), but that investment, which is scheduled to increase over the next few years, will put them in a better competitive position.
Given their existing market share and level of brand recognition, that could fuel significant growth in the next few years. CEO Andrew Jassy certainly expects it to, saying yesterday that generative AI is an opportunity for Amazon that could be worth “tens of billions.” That is probably true, and now that the company’s Bedrock AI service is up and running, they are well positioned to take advantage. For a while, though, that growth will have to be funded and with interest rates where they are, funding from existing operations is a much more attractive option than borrowing.
When a company gets as big and as complex as Amazon has become, investors tend to start overanalyzing results. They often look at the performance of new business sectors, and evaluate performance based on them. That is important, of course, as nobody likes to see failed or underperforming investments, but we shouldn’t forget to look at the base on which all that was built. Last quarter, Amazon expanded that base and regardless of how other business units performed for that three month period, that bodes well for the company’s future and therefore the stock.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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