Results at a glance
Source: Company, PSR
The Positive
+ Amazon Web Services (AWS) beat estimates. Amazon’s cloud business grew 37% YoY to US$18.4bn revenue, beating our estimate of 35% growth. Demand continued across the board from governments and not-for-profits to start-ups and enterprises. AWS expanded 16 local zones in the US, with 32 more to come across 26 countries.
The Negatives
– Higher costs hurt margins. Operating margin was 3.2%, significantly lower than an estimated 4.6% and at 3-year lows. External factors added US$2bn incremental costs: transport rates are 2x higher; fuel prices up 1.5x and wages are rising. Internal factors are productivity and overcapacity. Reduced productivity added US$2bn costs: Amazon is overstaffed after excess hiring during the COVID-19 Omicron wave which required sick leave replacements. Excess capacity in fulfilment added US$2bn costs in reduced fixed cost leverage: After expanding fulfilment services during the pandemic, consumer demand patterns have stabilized, while fixed costs from fulfilment remain elevated. Of the total US$6bn incremental costs incurred, US$4bn from productivity and overcapacity may ease in the next few quarters.
– Advertising growth was slower than expected. Ad revenue grew 23% YoY to US$7.9bn vs an estimate of 26%. We believe moderating e-commerce growth as the economy reopens and supply chain shortages impacting seller inventories was to blame. The advertising segment, along with AWS, is a key driver of operating income, estimated to have contributed US$7.1bn to 1Q22 operating income of US$3.7bn.
Outlook
Revenue guidance was weak, up to 8% lower than estimated, while the operating margin was up to 5% lower. The focus is to work down internal costs factors in productivity and overcapacity, while passing on some external costs to sellers through the 5% fuel and inflation surcharge announced on 14 April 2022. These will take time, perhaps up to three quarters. Staff numbers were worked down from a peak of 1.7mn to 1.6mn during the quarter, while Amazon’s annual Prime Day in July 2022, where demand usually surges, will help utilise fulfilment overcapacity.
Figure 1: 2Q22 guidance was weaker than consensus estimates
Source: Company, PSR
Maintain BUY with lower TP of US$3,130.00 (prev. US$4,079.00)
Our FY22e revenue and adjusted PATMI are cut by 3% and 15% respectively. Maintain BUY with a lower target price of US$3,130.00 based on DCF with a WACC of 6.2% and terminal growth of 5.0%. Secular growth drivers of AWS and advertising are intact, but Amazon is facing medium-term headwinds from normalising e-commerce growth, lingering inflationary costs and fulfilment overcapacity after the COVID-19 pandemic demand spike.
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