Amazon X-rayed: artificial intelligence helps but profits come from the cloud

A leap from $159.3 to $171.8. That's the rise (+7.8 per cent) of Amazon's stock in the session (2 February) following the release of the latest quarterly data. True! Afterwards (3 February) the shares retraced. And yet, the market appreciated the better-than-estimated accounts of the company founded by Jeff Bezos. Among other things, investors rewarded the rise in revenues to USD 169.9 billion (+14% compared to Q4 2022). The increase was driven, in particular, by the world of e-commerce. This, it should be remembered, is divided into various activities: from the sale of own products to services for the sale of third-party products (e.g. logistics) to subscriptions with Amazon prime and advertising. Precisely the latter, together with Internet shopping, which experienced a record in the festive period at the end of 2023, made a big contribution to the expansion of turnover. In short: Amazon's e-commerce ecosystem has done its job.

One might say: well, the situation has developed in line with the company object! In reality, the overall dynamics of the business must be analysed in greater depth. Firstly because, as always, a single quarter says little about the overall performance of any company. And, secondly, because the engine of profitability remains Amazon web services (Aws). That is to say: cloud computing. To realise this, one only has to look at the historical trend of the operating profitability of the division in question and compare it with the other areas. Here, it should be noted, the company offers a particular breakdown of the business. That is to say: operating income - and the revenues themselves - are divided between North America, International - to which e-commerce is generally attributed - and, precisely, Aws. Well, analysing the last five years, the profitability of cloud computing has steadily risen and has always generated the largest share of profits. In 2019, operating profit stood at USD 9.2 billion, and then increased to USD 13.5 billion and USD 18.5 billion in 2020 and 2021, respectively. The increase then continued, reaching 24.6 billion last year (it was 22.8 billion in 2022).

The gradually increasing dynamic is not replicated on the e-commerce front. This last activity, in North America, has an operating income that has moved - always in the last five years - within the range between the red in 2022 (loss of 2.85 billion) and the maximum of 14.8 billion reached in the last financial year (in 2019, operating income was 7.03 billion). Weak, for its part, the trend in the International area: with the exception of 2020 (700 million operating income), the division in question has always been marked, from 2019 to date, by profitability in the red (-2.6 billion loss in 2023). Not only that. Looking at the last quarter of last year, the underlying context - in principle - does not change. True! North America's operating profit posted a robust $6.4 billion (which is rewarded by the market). And, however, Aws remains the largest contributor in operating income: $7.1 billion. In other words: whichever way you look at it, the corporate profit machine remains the cloud.

However, it is precisely cloud computing - in the recent past - that has turned investors' noses up at it. Why? It has weighed on the fact that operators, accustomed to a fast pace, have been disappointed by the growth rates. Especially during the last financial year. In 2020, sales related to Amazon web services had increased by 29%. Subsequently, Amazon's cloud computing grew by 37% and 29% in 2021 and 2022 respectively. Then the 'decline': the 2023 cloud computing turnover increased by only 13.2%. Too little for the 'hungry' investors. In general, the slowdown was caused by lower spending by corporate customers in a scenario of economic slowdown and possible recession. That is: companies put their investments on the cloud computing front on 'standby' and some investors feared (still fear) that Aws could (may) be impacted - more than its competitors - by the phenomenon.

Having said that, however, two aspects should be emphasised. The first concerns the last quarter. Specifically: the operating income of Aws itself. This amounted to USD 7.1 billion, up 38% compared to the same period in 2022. That is to say: cloud profitability, in spite of lower revenue growth and similar to what happened in the third quarter, started to march fast again. Right! On the one hand, it is too early to sing victory; and, on the other hand, the trend described is certainly also the effect of the more general, and overall, operational efficiency drive that Amazon has recently put in place (also with numerous redundancies). That said, however, the market is not displeased with the trend in question.