Recap: Amazon beats estimates for Q3 sales and profit, CEO says its AI business is already 'significant'
Aaron Mok,Eugene Kim
Updated 11 min read
Amazon largely beat expectations for its Q3 earnings, though AWS revenue was a slight miss.View Press / Corbis News
Amazon reported third-quarter sales and profit figures that beat analyst estimates.
But AWS revenue slightly missed forecasts.
CEO Andy Jassy discussed AI, advertising, and AWS "headwinds" during the earnings call.
Amazon reported third-quarter earnings on Thursday, with both sales and profit beating analyst forecasts. However, the company fell slightly short of estimates for AWS revenue.
During the earnings call, Amazon CEO Andy Jassy and CFO Brian Olsavsky discussed topics ranging from AI to advertising spending to continued AWS "headwinds."
The executives said Amazon continues to make significant investments in generative AI — which they said was already a "significant" business for the company — and warehouse robots.
Jassy said he remained bullish on AWS, and sees "a lot of growth" in the longterm.
Amazon's stock was up 42% year-to-date, through Thursday's close, far outpacing the benchmark S&P 500. Shares popped 5% immediately in after-hours trading following the earnings report.
Amazon's shares are trading up more than 4% in after-hours trading as the call wraps
Amazon CEO Andy Jassy talked up the company's AI business and why he's bullish on AWS in the long-term.Michael Buckner/Variety via Getty Images
The stock had briefly dipped into the red going into the earnings call, but flipped back into the green as the call progressed.
Amazon sees companies being "more cautious" on some ad spending
Jassy says that on the ad front, "there's a lot I'm excited about," and mentions that many advertising-heavy businesses are struggling with growth amid a "difficult" economy.
But while Amazon has noticed companies being "more cautious" on top funnel products, it's still seeing strength in lower funnel ad spend, such as sponsored products.
Still, Jassy says that Amazon has "barely scraped the surface" on how to integrate advertising into video, audio, and groceries. He says Amazon started "externalizing sponsored products to third-party websites."
It's really hard to get the number of GPUs that everyone wants, CEO Jassy says
Jassy says that some AI companies are turning to Amazon's own AI chips for new workloads as GPUs from chip giants like Nvidia tend to be in short supply compared to the huge demand for those chips. Anthropic, for example, is using Amazon's in-house AI chips through the AWS cloud service.
Keep in mind: Amazon invested more than $1 billion into Anthropic as part of its agreement. But the question remains: Will other big AI companies choose Amazon's chips over Nvidia's if they're not getting a huge investment from Amazon?
CEO says Amazon continues to invest heavily in warehouse robotics
Jassy calls its robotics investment "significant," and that it has "made a huge difference for us," boosting productivity, lowering costs, and making warehouse work safer. Much of the company's investment will continue to come to fruition in 2024 and 2025, he says.
CEO Jassy says he's "surprised at the pace of growth of generative AI"
The Amazon CEO says generative AI is growing at a rapid pace and is already a "significant business" to the company.
Companies, Jassy says, are still trying to figure out how to implement large language models into their operations. He says customers are doing lots of experimentation with different LLMs and those of different sizes, as sometimes the cost of implementation into apps can be higher than expected for the largest models. AWS can help with this experimentation, he adds.
CEO says AWS is still seeing elevated customer optimization levels
It's more than a year ago, but improving compared to recent quarters, Jassy says.
Overall, CEO Jassy remains bullish about AWS in the long-term and sees "a lot of growth" in front of the business.
Amazon touts its work on AI
Amazon CEO Jassy touts the company's partnership with Anthropic, an AI startup which is set to receive $4 billion from the retail giant.
Amazon recently launched Code Whisperer, an AI coding assistant which Jassy says is the "equivalent of a senior engineer that knows their code base."
Jassy also highlights that Meta's Llama large language model is available on Amazon's Bedrock, the company's fully managed service that offers access to LLMs.
Amazon CFO says AWS customer cost optimization "continues to face headwinds"
Brian Olsavsky tells reporters ahead of earnings call that "customer cost optimization still remain a headwind" for its AWS cloud division.
"We have seen the rate of new cost optimization slow down in AWS, and we are encouraged by the strength of our customer pipeline," he says in a press call with reporters.
Amazon says buyers continue to remain "cautious about price"
"From a consumer behavior perspective, we still see customers remaining cautious about price trading down where they can and seeking out deals coupled with lower discretionary spending," Amazon says on a press call with reporters following the earnings release.
Amazon touts younger "Thursday Night Football" audience
Amazon says viewership of the first six Thursday Night Football games was up over last season, averaging 12.9 million viewers.
"Season to date, the median age for TNF viewers is 47, which is seven years younger than the median age watching the NFL on linear networks," Amazon says in its earnings release.
Analyst reaction: Jefferies highlights highest operating margin since Q1 2021
Jefferies analysts write that Amazon "executed on profitability again in Q3, with Operating Income coming in 44% ahead of consensus and drove 210bps of sequential margin improvement."
"The 7.8% Operating Margin in 3Q was the highest since 1Q21 (8.2%)," the analysts highlight.
Analyst reacts: 'On first blush, we are encouraged,' says DA Davidson's Tom Forte
"On first blush, we are encouraged by the better-than-expected sales and profits for 3Q23," analyst Tom Forte says. "We are also pleased by the fact that the midpoint of the profitability outlook was higher than the initial forecast."
"In particular, we look for more details on: 1) its 4Q23 sales outlook (including holiday sales expectation), 2) the performance of AWS, and 3) AI-related efforts," he adds.
Amazon's cost-cutting measures are paying off
Amazon's operating profit growth in the third quarter increased significantly year over year, after the retail giant implemented cost-cutting measures over the last year that included multiple rounds of layoffs.
The cost cuts contributed to a third-quarter operating profit of $11.2 billion, compared to $2.5 billion in 3Q 2022.
Amazon stock climbs in after-market trading following earnings beat.
MarketWatch
Amazon's stock popped 5% immediately after the company reported sales and profit figures that beat analyst estimates. That gain pared to 3% in the 20 mins that followed.
If the gain holds, the company's shares will open on Friday more than 45% higher for the year, far outpacing the benchmark S&P 500.
Amazon Q3 net sales beats analyst estimates.
3rd quarter results
Net sales $143.08 billion, +13% y/y, estimate $141.56 billion
AWS net sales $23.06 billion, +12% y/y, estimate $23.13 billion
North America net sales $87.89 billion, +11% y/y, estimate $87.12 billion
International net sales $32.14 billion, +16% y/y, estimate $32.08 billion
Amazon Web Services net sales excluding F/X +12% vs. +27% y/y, estimate +12.4%
EPS $0.94 vs. $0.65 q/q, estimate $0.58
4th quarter guidance
Forecasts net sales $160.0 billion to $167.0 billion, estimate $166.57 billion
Forecasts operating income $7.0 billion to $11.0 billion, estimate $8.71 billion
Source: Bloomberg
Big holiday hiring spree signals continued retail demand, BofA says.
Amazon
The US consumer has continued to show surprising resilience, and that could show up in Amazon's latest earnings. Online shopping was up 1% year-over-year over the third quarter, according to Bank of America credit and debit card data, a trend that could continue through the end of the year.
"As for 4Q, Big Deal Days data points seemed strong, and we think holiday hiring (+250k) signals still-strong demand," analysts at the bank said in a note.
Bank of America reiterated its "Buy" rating with a $174 price target, representing potential upside of 43%.
Jefferies says 'we see runway for continued margin improvement'
AWS profits are set to pick up, according to Jefferies. Cloud optimizations are winding down while AI demand is ramping up, which should support an acceleration in Amazon's AWS business, Jefferies said.
"We believe AWS Net Sales expectations have bottomed and expect to see continued positive estimate revisions drive the story higher as cloud cost optimization headwinds fade and AI-driven workloads support new migrations," Jefferies analysts said in a note last week.
Jefferies rates Amazon at "Buy" with a $175 price target, representing potential 44% upside from Wednesday's closing price.
JMP says Prime Big Deal Days will represent an 'elongation' of holiday spending.
Spencer Platt/Getty Images
Analysts at JMP say that earnings will show sales surged during Amazon's big sale events like Prime Day, and the company has already reported over 150 million sales during the last two-day event.
"While we are impressed with the success of AMZN's Prime Big Deal Days event, we do not view it as a material incremental benefit to revenue but rather an elongation of holiday spending," the JMP analysts wrote.
They added that consumers stretching out their holiday spending over a longer time could also drive continued margin upside into the fourth quarter.
JMP rates Amazon at "Buy" with a $175 price target, representing potential upside of 44% from Wednesday's close.
Goldman eyes stable AWS revenue, but sees rising competition and higher energy costs.
Goldman Sachs thinks revenue from the important Amazon Web Services segment of the company will show stable growth in the latest earnings, according to cloud computing industry checks that analysts performed through September.
However, competition from lower-cost retailers like Temu as well as rising energy costs are headwinds for the e-commerce giant's physical stores and AWS business.
"We believe that each +10 increase in energy costs could result in a $200-$300mm headwind to Q3 EBIT," analysts said.
Goldman Sachs reiterated its "Buy" rating but lowered its price target to $175 a share, representing potential upside of 44% from Wednesday's close.
JPMorgan sees strong consumer powering continued retail sales growth.
AP/Gene J. Puskar
In its note ahead of Amazon's earnings report, JPMorgan said it expect strong sales growth for the ecommerce giant despite an uncertain macroeconomic backdrop. That outlook is powered by continued resilience displayed by US consumers, who have helped prop up corporate earnings in the face of rising interest rates.
"AMZN remains our Best Idea & we continue to expect AWS acceleration in 2H23, Retail growth uptick, healthy NA margin expansion, & Y/Y decline in total capex, all of which should drive significant FCF inflection this year," the analysts wrote in their note.
JPMorgan has rated Amazon a "Buy" with $180 price target, representing potential upside of 48% from Wednesday's closing price.
Amazon's consensus third-quarter net sales estimate is $141.56 billion.
3rd quarter
Net sales estimate: $141.56 billion
Online stores net sales estimate: $56.82 billion
Physical Stores net sales estimate: $4.99 billion
Third-Party Seller Services net sales estimate: $33.4 billion
Subscription Services net sales estimate: $10.13 billion
AWS net sales estimate: $23.13 billion
North America net sales estimate: $87.12 billion
International net sales estimate: $32.08 billion
Third-party seller services net sales excluding F/X estimate: +16.6%
Subscription services net sales excluding F/X estimate: +13.2%
Amazon Web Services net sales excluding F/X estimate: +12.4%
