Amazon (NASDAQ: AMZN) stock ticked higher after hours on Tuesday after its first-quarter earnings report.
The company beat estimates on the top and bottom lines as its profit margins continued to ramp sharply higher. Overall revenue in the quarter rose 13% to $143.3 billion, topping estimates at $142.4 billion, and earnings per share (EPS) jumped from $0.31 to $0.98, ahead of the consensus at $0.82, even though the company had a $2 billion non-cash loss in its investment in Rivian.
Moving beyond the headline numbers, let’s dig a little deeper and see why Amazon looks like a buy after the latest report.
1. Margins are surging across the board
For much of Amazon’s history, the company operated near breakeven as it kept prices down to grow market share and invested in growth.
In the last few years, it’s finally begun reaping the fruits of its efforts as all three of its business segments saw margins jump sharply in the quarter, benefiting in part from an improvement in macroeconomic conditions as most businesses are no longer anticipating a recession. Cost cuts, including layoffs, also helped drive margins higher.
In its North America segment, which is primarily made up of e-commerce, revenue jumped 12% to $86.3 billion and operating income surged from $898 million to $5 billion. That was driven by strong growth from higher-margin businesses like its third-party seller services, which rose 16%, and advertising, which jumped 24%.
In the international segment, which has been a chronic money-loser, it flipped an operating loss from $1.2 billion to a profit of $903 million as revenue increased 10% to $31.9 billion. Amazon is seeing more of its mature international markets turn profitable, driving improvements in that segment.
Finally, even Amazon Web Services (AWS), its cloud-infrastructure business, saw operating income nearly double from $5.1 billion to $9.4 billion.
While the benefit of last year’s layoffs will fade over the course of the year, Amazon’s margins should continue to improve as its higher-margin businesses continue to outgrow its lower-margin ones.
2. AWS’ revenue growth is accelerating
AWS has been Amazon’s primary source of growth and profits for much of the past decade, but over the last couple of years, growth in its cloud business suddenly slowed amid cautiousness from its customer base.
However, the Q1 earnings report showed revenue growth at AWS accelerating, a sign that the key business was facing a short-term headwind rather than a structural slowdown.
The company reported 17% growth in AWS to $25 billion, its fastest growth rate since Q4 2022.
On the earnings call, CEO Andy Jassy noted that companies had completed the cost optimizations that took place during last year’s tech recession and are turning their focus on expansions. Additionally, the move from on-premise to cloud-based IT is restarting after the pause created by uncertainty during the onset of the COVID-19 pandemic.
There’s still a large, long-term opportunity in cloud computing, and AWS looks well positioned to take advantage of that following a brief setback.
3. The valuation keeps falling
As Amazon profits, its valuation is finally falling to a reasonable level relative to its peers.
Though it’s still more expensive than most of the stocks in the “Magnificent Seven,” the stock now trades at a price-to-earnings (P/E) ratio of 50, and that should continue to come down as its margins expand and revenue grows.
A lower P/E ratio not only offers investors a better entry point for Amazon stock, but it also protects the stock from plunging on a disappointing earnings report.
While Amazon stock still isn’t cheap, the valuation does look a lot more reasonable than it did a year or two ago, and as it becomes more attractive, it should bring in more new investors.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jeremy Bowman has positions in Amazon. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.
3 Reasons to Buy Amazon Stock Now was originally published by The Motley Fool