The cloud is back at Amazon, putting the stock on a path back to Covid-era record highs
Amazon shares jumped after-hours Thursday, following the e-commerce and cloud computing giant's strong fourth quarter. Results like this happen when Amazon shifts its mindset from an "investing" cycle to a "harvesting" phase, which usually leads to big profit numbers like what we saw in the quarterly print and what was forecasted in the future. Revenue increased 14% year-over-year to $169.96 billion, beating expectations for $166.21 billion, according to estimates compiled by LSEG, formerly Refinitiv. Earnings-per-share (EPS) on the basis of generally accepted accounting principles (GAAP) increased to $1, compared with 3 cents last year and the 80-cent estimate. Operating income increased over 383% to $13.21 billion, significantly exceeding forecasts of $10.4 billion, according to FactSet, and above the high-end of management's previous guidance of $11 billion. Bottom line Well, well, well. Would you look at the quarter Amazon just delivered. Expectations were high going into earnings — considering the stock's 81% rise in 2023 and a strong start to 2024 — and Amazon checked the boxes of exactly what the bulls wanted to see. One of the main highlights came from its cloud unit, Amazon Web Services (AWS), where revenue growth finally accelerated. Throughout last year we had hoped this would happen by Amazon's fourth quarter, so we're pleased to see this achievement. Better yet, management's comment about how it expects accelerating AWS revenue trends to continue through 2024 should keep the bulls happy. Amazon has also fully gained control of its expenses. Whether through finally growing into its huge fulfillment center network that swelled during Covid and more recent last-mile logistics expansions, ongoing efficiency initiatives, or inflationary factors finally easing, the company has delivered serious progress on margins. We look forward to seeing how management's goal of further reducing costs to serve its e-commerce business plays out in the years ahead. AMZN 1Y mountain Amazon 1 year Thanks to its 7% jump to $170 per share, the stock is finally closing in on its Covid-era highs of the mid-$180s. If the AWS revenue growth acceleration continues and the company continues its progress on expanding margins, the stock should get back there. To that end, we're increasing our price target to $190 per share from $160. Quarterly commentary It was a quarter of near-universal beats, and that's pretty much all you can ask for. Sure, total expenses at $156.75 billion in Q4 were higher than expected and up 7% from the year-ago period, but that's a function of the stronger revenue. The impressive part here was on margins, where in North America it expanded to 6%, up from about 5% in the third quarter and about 2% for all of last year. Margins in the region have now improved for seven consecutive quarters off the lows of the first quarter of 2022, which logged a negative 0.26%, as seen in the Regions part of the earnings table below. On revenue, the long-awaited acceleration in AWS happened with sales increasing 13.2% to $24.2 billion in the quarter. Growth here may not be as fast as Microsoft 's Azure, which just reported a 30% increase in revenue, but AWS is working off a much higher base. Driving this accelerating revenue growth was an increase in larger new deals while the cost optimization headwind "continued to attenuate," the company said. Revenue from generative artificial intelligence accelerated as well, helping the backlog grow to $155.7 billion, up more than $45 billion from last year and up $20 billion from the third quarter. Profitability was a bright spot too, with AWS' operating margin expanding almost to 30% from just over 24% a year ago, thanks to headcount reduction and a slowdown in the pace of hiring. Online sales increased 9% to $70.54 billion, boosted by a strong holiday season that featured the Prime member exclusive Big Deal Days event and continued into the Black Friday and Cyber Monday shopping events, which turned out to be Amazon's largest event ever. Amazon said these events helped bring in new customers and Prime members. In addition to competitive prices, speed is a big reason for Amazon's e-commerce success and 2023 was the fastest year ever for delivery to Prime members. There are two reasons for this: the expansion of same-day facilities and Amazon's regionalization initiative. The latter has been most impactful to the company's broader results as it also helps drive costs down. In fact, in this past year, Amazon reduced its cost-to-serve on a per-unit basis globally for the first time since 2018. Management said this evening it thinks it can lower its cost to serve even more in 2024. Advertising revenue, which mostly comes from sponsored ads, grew much faster than expected at 27% to $14.65 billion versus estimates closer to 22% growth. Future quarters will get a boost from the recent addition of ads on Prime Video. If you want to skip the ads, the extra $2.99 per month fee will flow into Subscription Services, which was also better than expected with 14% sales growth to $10.49 billion. It sounds like Thursday Night Football has been a huge success with the number of people watching growing by 24% year over year and gains in ad sales. Guidance Amazon expects first-quarter net sales to be between $138 billion to $143.5 billion, growing 8% to 13% year over year. Interestingly, the dollar has switched from foe to friend because this guide anticipates a favorable impact of approximately 40 basis points from foreign exchange rates. But the key thing is that this outlook brackets consensus estimates of $142 billion. The operating income estimate should catch attention, as Amazon said it expects to deliver between $8 billion and $12 billion in operating profits, which at its midpoint of $10 billion was well above estimates of $8.9 billion. It also puts margin at around 7% compared to estimates of 6.3% and 3.75% in the first quarter of 2023. There's a small caveat here. Amazon said the guide includes a benefit of $900 million from lower depreciation expense due to an increase in the estimated useful life of servers. However, it would still be a beat even if you backed that out. One thing to keep in mind, Amazon historically guides conservatively and posts operating income at least toward the high end of its guidance range. If you need proof, look no further than this quarter. Amazon originally guided fourth-quarter operating income to between $7 billion and $11 billion and just delivered $13.2 billion in operating profits. (Jim Cramer's Charitable Trust is long AMZN, MSFT. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Packages at Amazon's fulfillment center in Robbinsville, New Jersey, Nov. 27, 2023. Mike Segar | Reuters