The Amazon.com (NASDAQ:AMZN) share price is heading higher after the company’s Q3 earnings report. The stock was up 5% in extended trading Thursday (26 October).
Revenues were up 13% and net income more than tripled. So is it time for investors like me to load up on Amazon shares?
Growth
Before the report, Amazon shares traded at a price-to-earnings (P/E) ratio of around 95. That means only one thing – investors were expecting significant earnings growth either now or in the future.
Should you invest £1,000 in Rolls-Royce right now?
When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Rolls-Royce made the list?
Higher earnings can come from a couple of different sources. One is higher revenues and the other is increased profit margins.
In terms of sales, the company certainly delivered. Overall revenues were up 13%, with 26% growth in the firm’s advertising services shading recent reports from Alphabet (11%) and Meta Platforms (23%).
Amazon’s cost-cutting over the last 12 months also meant margins were wider than they were a year ago, boosting net income further. As a result, earnings per share grew from $0.28 in 2022 to $0.94.
Both sales and profits came in well ahead of expectations, so it’s fair to say the report was strong. But it wasn’t all positive, which is why the stock is still lower than it was at the start of the week.
Headwinds
One issue was the performance of the company’s cloud computing division. Amazon Web Services (AWS) managed revenue growth of 12% – well behind the results from Microsoft (29%) and Alphabet (22%) earlier this week.
AWS accounts for 69% of Amazon’s operating income, As a result, the unit’s slowing sales growth has been on my radar for some time and is something I think investors should pay attention to.
Management was reasonably positive on the outlook for the cloud business though. According to CEO Andy Jassy, several deals signed in September will show up in the Q4 report.
But the company was less positive about revenue guidance for the rest of the year. An outlook ranging $160bn-$167bn could indicate the company might fall short of the anticipated $166.6bn.
As a company that generates around 70% of its Q4 revenue from retail, the Christmas season is key to overall growth. And while 9% sales growth is definitely positive, analysts had been expecting better.
Foolish takeaways
As an Amazon shareholder, I found plenty to like about the company’s earnings. I’m encouraged by the growth in advertising sales and expansion of overall profit margins.
Nonetheless, the stock doesn’t look cheap to me at today’s price. There was a time when investors believed that AWS by itself was worth Amazon’s entire market-cap – I don’t think that’s true now.
In general, investors seem to view big tech companies as relatively low-risk investments for a tricky macroeconomic environment. That’s why the Amazon share price is up 40% since the start of 2023.
There’s some truth to this – strong balance sheets and dominant market positions are an attractive combination in tought times. But it means prices are quite high across the sector at the moment.
In terms of stocks to buy, I think the Amazon share price means there are better opportunities to be greedy where others are fearful. But as a shareholder, I’m not selling my stake any time soon.
