Amazon - FY24 Key Takeaways
Stock Update - AMZN FY24 Results
Amazon ended FY24 with solid momentum. 4Q revenue rose 11% to $188b while operating income lifted 60% to $21b, exceeding the top end of guidance by 5%. All three segments performed well, with North America (NA) revenue +10%, International +8% and Amazon Web Services (AWS) +19%.
1Q25 guidance disappointed with net sales of $151-$155b up 5-9% and operating income of $14-$18b up 4.5% at the midpoint. Revenue is expected to be impacted by FX of 1.5% and an additional day in the prior year of 1.2%. Similar to previous quarters, guidance is likely conservative. The key result takeaways are:
Operating margins continue to surprise and have further room to grow. The core Amazon thesis as explained here, is predicated on improving margins as Amazon reduces cost to serve and revenue shifts to higher margin segments. This progressed further in the 4Q, with NA margins particularly strong, growing from 6.1% to 8.0%, and reflects the success of initiatives like fulfilment regionalisation, inbound network optimisation and improved inventory placement.
The improvements have brought down cost to serve per unit for a second consecutive year and enabled faster and more efficient deliveries. CFO Brian Olsavsky highlights the room for further gains, “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. In the US, we're tuning our inbound network and continuing to expand our same-day delivery network. Globally, we're adding automation and robotics throughout our network.”
Based on my internal estimates, NA retails margins (retail operating profit/ gross merchandise value) are 2.2%, well below margins at traditional retailers (Target/ Walmart) of 5%. Given ecommerce is a more capital light model with lower working capital and store requirements, Amazon is likely under earning here due to extensive reinvestment and has a long runway to grow retail margins to 5% and beyond over time.
Amazon has 40% market share in NA e-commerce and is uniquely positioned to extend its dominance through generative AI. As the only pure-play, technology driven ecommerce player with scale, Amazon has a significant edge in being able to leverage generative AI to drive down costs while enhancing customer experiences and revenue streams. Examples include automation and robotics in fulfilment centres that deliver efficiencies, and AI-powered tools like Amazon Lens and Rufus that improve engagement and conversion. The scale of investment and technological know-how should strengthen the competitive moat, drive market share gains, accelerate the shift from offline to online ecommerce, and expand margins.
AWS is well positioned to be a key beneficiary of generative AI. The company has increased its gen AI prominence having developed its own frontier model Nova, enabled access to the broadest choice of 100+ models via Bedrock, and introduced custom built chips such as Trainium2 chips that offer 30-40% better price performance compared to other GPU instances.
The latter enables Amazon to play a critical role in reducing inference costs (the costs to run generative AI models) and scale more AI models. China's DeepSeek has shown advanced models can be developed at a fraction of the cost, signalling a broader trend of declining costs and lower barriers to enterprise adoption.
To get the full benefits of AI though, workloads need to move to the cloud, which is where Amazon is the undisputed leader. CEO Andy Jassy paints a bullish picture here, “And while it may be hard for some to fathom a world where virtually every app has Generative AI infused in 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 a cloud with the largest portion of it on AWS.”
Similar to the other tech giants, Amazon is investing significantly to capture the opportunity, with capex growing from $78b in FY24 to around $100b in FY25. The upfront investment is critical to capture future demand. CEO Jassy notes “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, I think it's actually quite a good sign, medium to long term, for the AWS business.” Near-term AWS margins should be impacted given lower gen-AI margins.
Amazon presents a compelling investment opportunity as the leading player with durable competitive advantages in two attractive industries. After decades of reinvestment to grow share, the company is now benefiting from an inflection in financials which sees average incremental margins of 25% vs current margins of 11%. This is achieved while returning significant benefits to customers. Ie Prime, a multi-pronged membership service that is priced at similar levels to Netflix.