• AWS remained AMZN’s crown jewel, though YoY growth continued to slow down. We expect strong competition from Microsoft to persist, especially in the infrastructure-as-a-service (IaaS) cloud market.
• Continued turnaround in ‘International’ segment. We expect growth to taper off in 2H21 as normalcy returns. Longer-term growth lies in its push into the Indian e-commerce market.
• Jeff Bezos’ exit should not have material impact. The move underscores AMZN’s ongoing pivot to its AWS segment.
• Guidance suggests uninterrupted growth. Guided net sales for 1Q21 are US$100-106bn. This implies 33-40% YoY, significantly higher than the 26.4% a year ago. Operating income is expected to be US$3-6.5bn vs. US$4bn a year ago.

4Q20 results at a glance

4 Takeaways from 4Q20 Earnings Call

1. AWS remained AMZN’s crown jewel, though YoY growth continued to slow down. AWS accounted for 10.1% of AMZN’s 4Q20 revenue, up from 6.7% in 2015. Operating profit-wise, it delivered a whopping 60%. Operating margin of 28.0% towered above the other business segments: North America 3.9%, International 1.0%. On the other hand, AWS’ revenue grew 28% YoY, a continued slowdown for 10 successive quarters (Figure 4). We expect strong competition from Microsoft to persist, especially in the infrastructure-as-a-service (IaaS) cloud market. From 2013 to 2019, AWS’ market share in IaaS expanded 5ppts. That of Microsoft was up 11ppts (Figure 5). But as backlog remained strong at about US$50bn, up 68% YoY, we foresee mid-20% growth in the near future.
2. Continued turnaround in ‘International’ segment. AMZN’s ‘International’ segment turned profitable only in 2Q20, thanks to a surge in demand from stay-home restrictions. Profitability continued into this quarter (Figure 2), on a 57.3% YoY increase in revenue as the UK and Europe continued to mandate stay-home. We expect growth to taper off in 2H21 as normalcy returns. Longer-term growth lies in its push into the Indian e-commerce market. Continued investments in its overseas network may keep operating margins low in the 1-2% range.
3. Jeff Bezos’ exit should not have material impact. Jeff Bezos will be stepping down as CEO in 3Q21. We do not foresee any material impact on AMZN. Rather, we are positive as the move underscores AMZN’s ongoing pivot to its AWS segment. Successor Andy Jassy has been with AMZN for close to 25 years. He set up – and currently helms – AWS. Under his stewardship, AWS should become an increasingly important pillar for AMZN.
4. Guidance suggests uninterrupted growth. Guided net sales for 1Q21 are US$100-106bn. This implies 33-40% YoY, significantly higher than the 26.4% a year ago. Operating income is expected to be US$3-6.5bn vs. US$4bn a year ago. AWS’ infrastructure in India, Switzerland and Melbourne will be expanded by 2H22. Management noted ‘significant customer momentum’, with ‘new migrations across major industries’ from strong brands such as JP Morgan Chase, Thomson Reuters, Viacom CBS and Twitter. These should sustain AWS’ long-term growth.

With ongoing restrictions, we expect stay-at-home demand to continue supporting net sales in its international markets. In its 1Q21 guidance, AMZN has assumed about US$2bn of COVID-related costs, lower than the US$4bn in 4Q20. We believe that as normalcy returns, a further easing of COVID-related costs may lift margins over the next 1-2 years.

Round-up

Still, we remain Neutral on AMZN. We believe demand for its cloud services will grow by mid-20% on the back of an improving economy, which may drive corporate spending on IT infrastructure. Ongoing stay-at-home restrictions and stimulus payments by the Biden administration may also support growth into 1H21. However, as normalcy accelerates in 2H21, YoY growth could slow from its high base in 2020 when there were widespread lockdowns.