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The US earnings season has revolved around AI progress among major tech companies. Microsoft, Alphabet, and Meta have all indicated that their substantial investments in AI are beginning to pay off, evident in their robust quarterly earnings. Consequently, the focal point of Amazon’s upcoming earnings report is likely to be its AI-aided business, AWS, and the rapidly expanding advertising segment.

AWS may remain a stable growth

Amazon’s Web Services (AWS) is seen as a pivotal core business of the company, commanding the leading market shares in the cloud business, trailed by Microsoft’s Azure and Google Cloud. While contributing approximately 14% of Amazon’s overall revenue, AWS is the most profitable segment, with an operating margin of 30%. In contrast, the online stores, Amazon’s primary revenue driver, generate only about 6% in margin. However, the segment has experienced a slowdown in growth over the past three quarters due to weakened cloud demand.

The AI race among major tech players underscores the critical role of the cloud business in propelling their growth. Competing with Microsoft’s ChatGPT and Google’s Bard, Amazon offers a similar chatbot tool “Q” integrated into AWS and garnered “a lot of interest” as noted by CFO Brian Olsavsky in the last earnings call. CEO Andy Jassy said its generative AI services could generate tens of billions of dollars in revenue in the coming years.

Strong momentum in Amazon’s advertising segment

In general, online advertising has seen a rebound since the second half of the year in 2023, buoyed by the AI surge and macroeconomic improvements worldwide. Amazon’s advertising services have recently gained momentum, with its year-on-year revenue climbing 26% in the final quarter of 2023, marking the fastest growth since the final quarter of 2022. Amazon’s advertising business holds the third position in market share, trailing behind Google and Meta. The upward trajectory in advertising may persist, particularly with the substantial potential of Amazon Prime Video. The company has started advertising on Prime Video and introduced an ad-supported plan earlier this year.

A steep headcount cut

Another factor contributing to Amazon’s recovery from a challenging 2022 is a significant layoff of 27,000 employees in 2022 and 2023. The tech giant recently announced plans to reduce hundreds of jobs in the cloud computing unit amid a slowdown in AWS sales growth. The company indicated that it needs to concentrate its efforts on key strategic areas that deliver maximum impact.

A review of Amazon’s Q4 earnings

In the final quarter of 2023, Amazon beat market expectations in all the key expects, with its net income surging to $10.6 billion from $278 million a year ago. This translates to earnings per share of $1.00 on revenue of $170 billion, exceeding the estimated $0.80 and $166.2 billion, respectively. Sales across several core segments, including online stores, third-party seller services, advertising services, and AWS, all exhibited growth, increasing by 8%, 19%, 26%, and 13%, respectively, from the same quarter last year. The company anticipates first-quarter revenue to fall within the range of $138 billion to $143.5 billion, reflecting an 8% to 13% year-on-year growth.

Earnings forecast for Q1 2024

According to Wall Street forecasts, the company is expected to achieve earnings per share of 82 cents on revenue of $142.6 billion (€133.2 billion), marking increases of 17% and 265% from the same quarter in 2023, respectively. AWS revenue is projected to reach $24.1 billion (€22.5 billion) up 13% from a year earlier, while its advertising business may generate sales of $11.8 billion (€11.2 billion), reflecting a 24% annual increase. The online store, the largest contributor to Amazon’s net sales, is anticipated to drive $54.8 billion (€51.2 billion) in revenue, representing a 7% growth from a year ago.