AMZN--Strong tailwinds underwrite the big bet?

 AMAZON FY24—Big bet on Inevitable future?

Result Summary

A good result with revenues in line and operating profit well ahead as operating leverage kicks in. AMZN is a leader in global e-commerce and cloud computing services (AWS). Both of these businesses are capital intensive and while returns are strong for AWS, the retail business invests well ahead of the curve and relies on growth to sustain the improving margins. The retail business offers large operational benefits through improving efficiency through logistical improvements benefiting from falling tech costs and the benefits garnered from that decrease in costs. The business is a big beneficiary of improving efficiency from falling IT costs and the operational leverage that is exhibited throughout the group. Overinvesting does leave the company vulnerable to slowdowns in revenue growth.

Will Hyperscalers win?

The hyperscalers have been big beneficiaries of the movement from on-premise to cloud-based servers. AWS as the pioneer in this industry had a first-mover advantage that is still evident now. AI has become another potential leg of growth and all hyperscalers and others are investing heavily to take advantage of this “once-in-a-generation” opportunity. The investments by the hyperscalers are immense. Will they get a return on that spend? At the moment all participants are

The industry can be fragmented into hardware/chip suppliers, such as NVDA, AMD, TSMC, infrastructure owners, AWS, Azure GCP, model owners and builders, Google, Chat GPT, Anthropic etc, AI agent App developers, which will be a very big area and the reason for the rest of the investment. The hyperscalers need to commoditise the other layers of the value stack so that the owners of the distribution and infrastructure scale can garner the largest share of the pie. That is not the case so far with the chip designers (basically all NVDA) gathering a large share. Secondly, the return on investment will require customers to continue to lock in more use of infrastructure by generating valuable use cases and renewing and increasing their contract load with the hyperscalers. That return depends on use cases including to a large extent agentic AI. At the moment demand exceeds supply but maintaining the dynamic is critical.

Summing up the bull case for AMZN, 1. The hyperscalers win and the rest of the stack gets commoditised and margin flows to distribution, infrastructure and scale, 2. Of the hyperscalers, the case for AMZN and MSFT appear more certain, 3. AMZN will get oversized benefits from AI in its operations as well as benefiting from third-party sales. 4. Use cases for AI explode as inferencing costs plummet, filling utilisation of DC and driving growth. 5. AMZN continues to take ad share. How important is ad rev to the store business? its over 100% of the segment profit. 6. E-commerce continues to take share.

VALUATION

A bit more tricky given the different dynamics between the retail business and AWS. AWS a leader in a highly profitable and strongly growing operation combined with a growing e-commerce business that is yet to achieve mature margins. I am prepared to cut some slack, given the range of outcomes, the strong tailwinds, and the strong record of success.

Buy Level $183. Given the flex in the valuation and the aggressive business model, we should be prepared for variability in the SP. At the buy price should be enough margin.

 

 

 

AMZN Ad Rev
			Mkt Growth
2021	30336		Dig Ad Ind
2022	37739	24%	-1%
2023	46906	24%	16%
2024	56214	20%	15%
Ads % of total Retail Rev		7%
		9%
		10%
		11%

 

Unit growth above cost growth.

 

CALL SUMMARY

Andy Jassy CEO

Today, we're reporting $187.8 billion in revenue, up 10% year-over-year. Without the fx headwind, revenue would have been 11% year-over-year and exceeded the top-end of our guidance. Operating income was $21.2 billion, up 61% year-over-year

Store Business

We saw 10% year-over-year revenue growth in our North America segment and 9% year-over-year in our International segment, excluding the impact from foreign exchange rates. Our continued focus on expanding selection, lowering prices and improving convenience drove strong unit growth that even outpaced our revenue growth.

Selling partners who made up 61% of items that we sold in 2024, our highest annual mix of third-party seller units ever. Customers continue to want Amazon to be the place they rely on for sharp pricing. Additionally, for Federal's annual pricing study found that entering the holiday season, Amazon had the lowest online prices for the eighth year in a row, averaging 14% lower prices on average than other leading retailers in the US.

Our relentless pursuit of better selection, price and delivery speed is driving accelerated growth in Prime membership.

We also remain squarely focused on cost to serve in our fulfillment network, which has been a meaningful driver of our increased operating income. We've talked about the regionalization of our US network. We've also recently rolled out our redesigned US inbound network. While still in its early stages, our inbound efforts have improved our placement of inventory so that even more items are closer to end customers.

Our per unit transportation costs continue to decline as we build out and optimize our last mile network. Overall, we've reduced our global cost to serve on a per unit basis for the second year in a row, while at the same time, increasing speed, improving safety and adding selection. As we look to 2025 and beyond, we see opportunity to reduce costs again as we further refine inventory placement, grow our same-day delivery network and accelerate robotics and automation throughout the network.

In advertising, a $69 billion annual revenue run rate, more than double what it was just four years ago at $29 billion. Sponsored products, the largest portion of ad revenue are doing well and we see runway for even more growth. We also have a number of newer streaming offerings that are starting to become significant new revenue sources.

We've made it easier to do full-funnel advertising with us. Full-funnel is from the top of the funnel with broad-reach advertising that drives brand awareness to mid-funnel, where sponsored brands let companies specify certain keywords and audiences to attract people to their detail pages or brand store on Amazon. To bottom of the funnel, where sponsored products help advertisers service relevant product ads to customers at the point of purchase.

AWS

now has a $115 billion annualized revenue run rate. And though we expect growth will be lumpy over the next few years as enterprise adoption cycles, capacity considerations and technology advancements impact timing, it's hard to overstate how optimistic we are about what lies ahead for AWS's customers and business.

I spent a fair bit of time thinking several years out. And while it may be hard for some to fathom a world where virtually every app has generative AI infusing it with inference being a core building block just like compute, storage and database, and most companies having their own agents that accomplish various tasks and interact with one another. This is the world we're thinking about all the time and we continue to believe that this world will mostly be built on top of the cloud with the largest portion of it on AWS.

To best help customers realize this future, you need powerful capabilities in all three layers of the stack. At the bottom layer for those building models, unique compelling chips. Chips are the key ingredient in the compute that drives training and inference.

However, there aren't that many generative AI applications at large scale yet. And when you get there as we have with apps like Alexa and Rufus, cost can get steep quickly. Customers want better price performance and it's why we built our own custom AI silicon. Eg Trainium 2. Building outstanding performing chips that deliver leading price performance has become a core strength of AWS'.

The other key component for model builders is services that make it easier to construct their models. SageMaker AI, which has become the go-to service for AI model builders to manage their AI data, build models, experiment, and deploy these models, …saving training time by up to 40%.

At the middle layer for those wanting to leverage frontier models to build GenAI apps, Amazon Bedrock is our fully managed service that offers the broadest choice of high-performing foundation models with the most compelling set of features that make it easy to build a high-quality Generative AI application.  Like SageMaker AI, Bedrock is growing quickly and resonating strongly with customers. Related, we also just launched Amazon's own family of frontier models in Bedrock called Nova. These models compare favourably in intelligence against the leading models in the world, but offer lower latency, lower price, about 75% lower than other models in Bedrock, and are integrated with key Bedrock features like fine tuning, model distillation, knowledge bases of RAG and agentic capabilities

At the top layer of the stack, Amazon Q is the most capable Generative AI-powered assistant for software development and to leverage your own data. Early customer testing indicates that Q can turn what was going to be a multiyear effort to do a mainframe migration into a multi-quarter effort, cutting by more than 50% the time to migrate mainframes. This is a big deal and these transformations are good examples of practical AI. While AI continues to be a compelling new driver in the business, we haven't lost our focus on core modernization of companies' technology infrastructure from on-premises to the cloud.

Brian Olsavsky CFO

Worldwide operating income was $21.2 billion, our largest operating income quarter ever, and was $1.2 billion above the high end of our guidance range.

This marks the eighth consecutive quarter where we've seen year-over-year margin improvement in both the North America and International segments.

Looking ahead, we have several opportunities to keep lowering our costs through even better inventory placement, which also allows us to deliver items to customers faster.

We will also continue to invest in experiences that have the potential to be important to customers in Amazon long term in areas like Alexa, healthcare, and grocery, as well as Kuiper, including the planned launches of our production satellites in the coming months. As a reminder, we currently expense the majority of the costs associated with the development of our satellite network. We will capitalize certain costs once the service achieves commercial viability, including sales to customers.

Customers recognize to get the full benefit of generative AI, they have to move to the cloud.

we expect AWS operating margins to fluctuate over time, driven in part by the level of investments we're making. Additionally, we increased the estimated useful life of our servers starting in 2024, which contributed approximately 200 basis points to the AWS margin increase year-over-year in Q4.

Now turning to our capital investments. As a reminder, we define these as a combination of cash CapEx plus equipment finance leases. Capital investments were $26.3 billion in the fourth quarter, and we think that run rate will be reasonably representative of our 2025 capital investment rate. Similar to 2024, the majority of the spend will be to support the growing need for technology infrastructure.

revenue guidance for Q1. Net sales are expected to be between $151 billion and $155.5 billion. Q1 operating income is expected to be between $14 billion and $18 billion. This guidance includes the estimated impact of certain updates to the useful life of our fixed assets. I'll provide a bit more detail in a moment, but on an aggregate basis, we estimate this will decrease full-year 2025 operating income by approximately $400 million (net) for the assets on our balance sheet as of December 31, 2024. First, in Q4, we completed a useful life study for our servers and networking equipment and observed an increased pace of technology development, particularly in the area of artificial intelligence and machine learning. As a result, we're decreasing the useful life for a subset of our servers and networking equipment from six years to five years, beginning in January 2025. We anticipate this will decrease full-year 2025 operating income by approximately $700 million. In addition, we also early retired a subset of our servers and network equipment, we recorded a Q4 2024 expense of approximately $920 million from accelerated depreciation and related charges, and expect this will also decrease full-year 2025 operating income by approximately $600 million. Both of these server and network equipment useful life changes primarily impact our AWS segment. Lastly, we also completed a useful life study for certain types of heavy equipment used in our fulfilment centres and are increasing the useful life from 10 years to 13 years beginning in January 2025. We anticipate this will increase full-year 2025 operating income by approximately $900 million.

Question-and-Answer Session

Capex 2025 $100m

The vast majority of that CapEx spend is on AI for AWS. we have to procure data center and hardware and chips and networking gear ahead of when we're able to monetize it. We don't procure it unless we see significant signals of demand. And so, when AWS is expanding its CapEx, particularly in what we think is one of these once-in-a-lifetime type of business opportunities like AI represents, …we think virtually every application that we know of today is going to be reinvented with AI inside of it and with inference being a core building block just like compute and storage and database.

If you believe that, plus that altogether new experiences that we've only dreamed about are going to actually be available to us with AI, ..I think that both our business, our customers and shareholders will be happy medium-to-long term that we're pursuing the capital opportunity and the business opportunity in AI.

We also have CapEx that we're spending this year in our Stores business really with an aim towards trying to continue to improve the delivery speed and our cost to serve.

AWS constrained?

However, it is true that we could be growing faster if not for some of the constraints on capacity. And they come in the form of -- I would say, chips from our third-party partners come in a little bit slower than before with a lot of midstream changes to take a little bit of time to get the hardware actually yielding the percentage healthy and high-quality servers we expect. It comes with our own big new launch of our own hardware and our own ships in Trainium2, which we just went to general availability at re:Invent but the majority of the volume is coming in really over the next couple of quarters, the next few months.

It comes in the form of power constraints where I think the world is still constrained on power from where I think we all believe we could serve customers if we were unconstrained. We're still growing at a pretty reasonable clip, as I mentioned earlier, but I do think we could be growing faster if we were unconstrained. I predict those constraints really start to relax in the second half of 2025.

Infrastructure demand

There is a lot of innovation to come. And I think if you run a business like AWS and you have a core belief like we do that virtually all the big generative AI apps are going to use multiple model types and different customers are going to use different models for different types of workloads. You're going to provide as many leading frontier models as possible for customers to choose from. And that's what we've done with services like Amazon Bedrock.

one of the interesting things is sometimes people make the assumption that if you're able to decrease the cost of inference that somehow it's going to lead to less total spend on technology-- we have never seen that to be the case. …what else they could build that they always thought was cost-prohibitive before and they usually end up spending a lot more in total on technology once you make the per unit cost less.

I believe the cost of inference will meaningfully come down. I think it will make it much easier for companies to be able to infuse all their applications with inference and with generative AI….we do where we want to make it as easy as possible for customers to be successful in building customer experiences on top of our various infrastructure services, the cost of inference coming down is going to be very positive for customers and for our business.

AWS margins

AWS we have seen a lot of fluctuation in operating margin AWS. And we've said historically that they will be lumpy over time. And the stage we're in right now, AI is still early stage. It does come originally with lower margins and a heavy investment load as we've talked about. And in the short-term, that will be a headwind on margins. But over the long-term, we feel the margins will be comparable in non-AI business as well.

UPS volumes

I think UPS has decided that serving Amazon is a lower margin for them and so I think they've walked away from some of the volume that they otherwise could have had in the partnership. We're able to handle it with our own logistics capability, and we'll see how it continues to evolve.

Use of AI in AMZN biz

The way I would think about it is that there are kind of two buckets of how we see people, both ourselves inside Amazon, as well as other companies using AWS, how we see them getting value out of AI today.

The first bucket, I would say, is really around productivity and cost savings. And in many ways, this is the lowest-hanging fruit in AI, and you see that all over the place in our retail business. eg, customer service with the new Generative AI-infused chatbot, we've built a Generative AI application form for client listings in online store, and inventory management the Generative AI applications we've built there have led to 10% better forecasting on our part and 20% better regional predictions. In our robotics, the brains in a lot of those robotics, or Generative AI-infused to do things like instructing the robotic claw. So we have a number of very significant, I'll call it, productivity and cost savings efforts in our retail business.

The second bucket is really altogether new experiences. And again, you see lots of those in our Retail Business, ranging from Rufus, which is our AI-infused shopping assistant, which continues to grow very significantly, to things like Amazon Lens, where you can take a picture of a product that's in front of you. Finding the right size across brands, AI recommends size.

Store business speed of delivery and efficiencies

Yes. I would say on speed of delivery that we measure this very carefully and we measure both, what the conversion rate is of somebody who views a product detail page with a faster delivery promise versus those that are slower, as well as what we see downstream from customers once they bought with a fast promise and what they end up buying throughout the year. And we have not yet seen diminishing returns and being able to continue to improve the speed of delivery. …we see that people choose to buy from us more frequently, and we're able to deliver to their homes or wherever they are much more quickly. And it leads to actually using us for more of their everyday purchases when we can deliver more quickly.

Prime Air, the promise there is for a number of items that we'll be able to deliver items to customers inside an hour. And I think when you're ordering everyday essentials where you need something more quickly, it's a big deal. And you see it, it's had a big impact on our everyday essentials. It's had a big impact on our pharmacy business, where people are able to get items same day now in lots of cities throughout the US And they're just using us much more frequently than they had before.

On the inbound network efficiencies, ..And we have all sorts of ways here that, where I think it's early, and I think we're going to get additional efficiencies throughout the year. But I expect that we'll have opportunities to keep taking our cost to serve down this year and that will be a big part of it.

Agents impact on retail

I think retailers ourselves and probably lots of other retailers are all going to have their own say on how they want to interact with agents. I think that it's an emerging space. …most retailers are going to have kind of terms in which they're going to interact with agents and we will be no different that way.

Amazon agent Rufus, it continues to get better and better. ….we have so many customers now who just use Rufus to help them find a quick fact about a product. They also use Rufus to figure out how to summarize customer reviews. If you look at the personalization, really most prominently today, your ability to go into Rufus and ask what's happened to an order or what did I just order or can you pull up for me this item that I ordered two months ago. The personalization keeps getting much better.