• 2Q23 revenue was in line with our expectation, while earnings exceeded. 1H23 revenue/PATMI at 47%/68% of our FY23e forecasts. Earnings outperformance was due to higher-than-expected gross margins.
• Revenue grew 10.8% YoY, beating top-end of company guidance. AWS was up 12% and growth seems to have bottomed out.
• We upgrade to a BUY rating with an increased DCF target price of US$175.00 (prev. US$120.00), with a WACC of 6.4% and terminal growth rate of 5%. We increase our FY23e PATMI forecast by 39% to account for the higher margins as well as the lower CAPEX spending plans.

The Positives

+ Revenue beats guidance. 2Q23 revenue grew 10.8% YoY to US$134.4bn, above the top end of US$133bn company guidance. International segment revenue growth re-accelerated QoQ as it was up by 9.7% YoY, from a growth of 1% YoY in 1Q23, as macro conditions continue to improve. Advertising growth also improved, increasing by 22% YoY (vs 21% in 1Q23) to US$10.7bn (7.9% of total revenue), with Amazon’s performance-based advertising offerings being the largest contributor. AWS was up 12% YoY, slightly above company guidance of 11%.

+ AWS growth stabilising. Despite customers continuing to optimise costs in 2Q23, management said it has started seeing some customers shift their focus towards innovation and new workload deployments. Amazon sees the trend continuing into 3Q23 and it expects the optimisation efforts to ease further, suggesting that growth has bottomed out. Hence, we believe there is a possibility of re-acceleration in 2H23, particularly in 4Q23, as Amazon rolls out its new AI services while customers gradually increase their spending on AWS.

+ Efficiency enhancements drive operating leverage. Gross and operating margins each expanded by ~300bps YoY, with operating income more than doubling to US$7.7bn from US$3.3bn in 2Q22. This was driven by the reduction in the cost to serve (shipping and fulfillment costs) as Amazon is seeing easing inflation headwinds, particularly in fuel prices, linehaul rates, ocean and rail rates. In addition to that, it is also benefitting from the headcount reductions (which fell by 4% YoY or 62,000 employees) and a lower CAPEX. The company’s regionalisation initiative is paying off as it reduced the number of touches for packages by 20% and miles traveled to deliver packages to customers by 19%, resulting in less transportation costs and faster delivery speed.

+ Strong free-cash-flow. Trailing-twelve-months (TTM) FCF was US$7.9bn, the first positive FCF since 3Q21. The improvement was driven by increased operating income as a result of higher operating leverage and the moderating inflationary pressure, as well as lower CAPEX.

The Negative

– Nil.