Amazon earnings: AWS performance was the 'disappointment,' analyst says

JMP Securities, a Citizens Company, Equity Research Analyst Nick Jones sits down with Yahoo Finance Live to dissect Amazon's latest earnings report and unit sales in the greater tech environment.

Video Transcript

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SEANA SMITH: Amazon shares now off just about 5 and 1/2% here in extended trading following its fourth quarter earnings results. Revenue did beat, but guidance here, revenue guidance for the current quarter, a bit lackluster-- one of the reasons why we're seeing some pressure on the stock here after hours. Also, AWS revenue falling short of the Street's expectations. We want to talk about it with Nick Jones, JMP Securities Equity research analyst.

Nick, it's great to see you. So, your first take on this report and the reaction that we're seeing in the stock in extended trading.

NICK JONES: Yeah, so initially, you know, the fourth quarter looked OK, top line B and then really, operating income came in better than we and consensus were looking for. But where the disappointment really is is in AWS performance. That came in a little lighter than expected. And as you kind of mentioned earlier, the outlook wasn't great.

Now I think top line missing a little bit with FX headwinds can be digested, but really, it's on operating income. On the Street, we are looking for Amazon to control costs a little bit more. So, there's definitely some bright spots on the fourth quarter. Looks like the early access Prime Day benefited third party retail. But, we're looking for stronger outlook. But, it highlights kind of the tough macro environment we're in in these e-commerce companies that cloud companies are facing.

- Andy Jassy saying in the release, in the short-term, we face an uncertain economy, but we remain optimistic about the long-term opportunities for Amazon. What in this report surprised you most, Nick?

NICK JONES: I was really pleased with 3P. I thought those tails were really strong. I think people were wondering whether or not the early access sales event would kind of work out for them. This is the first time ever they did a second Prime Day in one year. So I thought that was a bright spot that that's a tool that they have in their toolbox to kind of utilize their infrastructure better if they need to and really tap into that strong user base.

Really, as we go into the call later tonight, I think the focus really is on what's the backlog number. What kind of commentary are we going to hear around AWS?

- So within AWS-- and I've been doing a kind of Control-F-- or Command-F for the Apple folks out there-- on all of these earnings reports on artificial intelligence and all of the claims that we're seeing pour in about how artificial intelligence is supposed to revolutionize some of the different products or solutions companies have.

Amazon, they are certainly within that bunch as well here, saying that they're going to have AI within their intelligence models for AWS. What's the reality of that being a real needle-mover for some of their portfolio clients?

NICK JONES: I think it's tough to say today. You see a lot of tech companies laying people off. Making tech investments in new technology is clearly on the forefront, but maybe they're rationalizing a little bit more on really what's going to preserve cost and drive top line revenue. So I think long-term, that's definitely a theme. Near-term, I'm not sure it moves the needle.

SEANA SMITH: Nick, what about some of those cost-cutting efforts? We know that they are cutting 18,000 jobs, already started that. Is that enough to boost profits down the line, or do you think more action will be necessary?

NICK JONES: They may need to take some more action. That said, Amazon has a long runway of growth ahead of them. So they're balancing where their long-term vision is versus kind of what Wall Street's looking for near-term. So they're pleasantly surprised with operating income in quarter 2, but once you guide a little lighter than people were looking for, so I would not be shocked to see more action taken later in the year, but it depends how the macro environment plays out here.

That said, you really want to see Amazon continue to invest for future growth. There's still a lot of runway in AWS and cloud, and a lot of runway in retail, and a lot of runway in advertising.

- Well, AWS, cloud, advertising, high-margin businesses. Retail, you look at the e-commerce figure, and that came in slightly below some of the revenue estimates that were anticipated coming into this report. Is there anything that you can take out of this report and kind apply to the mindset of the consumer right now?

NICK JONES: Yeah. I mean, when you look at macro factors such as credit card debt, savings rates, kind of maybe leading indicators of where the discretionary spend is, it looks like it is starting to wind down a little bit. We even heard Meta talk about yesterday in advertising that e-com is still declining year over year, but it's kind of improving. That said, it's still declining and maybe starting to stabilize.

So it'll be interesting to see kind of how the consumers shake out, whether or not they still have some dry powder in their pockets to go and spend on things across e-commerce.

- Much-publicized layoffs of 18,000, but they ramped up head count 800,000 from 2019 to 2021. Do you expect to hear about further reductions?

- Potentially, I think that's-- you know, that's a factor. We could see the stock price. Investors were clearly looking for a better operating income guide into one too, but I'm going to go back to kind of what I said earlier. They need to make investments in advertising, cloud, continue to make investments in retail, continue to grow those businesses longer-term versus kind of dealing with near-term pain.

They have a strong balance sheet. They can navigate this. It's really just what the Street wants out of Amazon today. All of that said, would not be surprised to see additional headcount reduction.

- How significant is the continued loss on Rivian?

NICK JONES: Near-term, you know, it's-- I don't know that it's that significant. I think most investors are kind of laser-focused on operating income. It's definitely worth keeping an eye on. But it's a volatile market today, right? Stocks are down and then kind of highly-shorted stock have all ran way up. Some are up 100, 200% year to date. So that's going to be a volatile line item that we're going to monitor near-term. I don't think it is a huge factor today.

- 100 million viewers worldwide for their first season of "The Lord of the Rings," they touted. Why do I bring that up? Because of Amazon Prime, and the-- of course, ecosystem that they've tried to have scale across entertainment, across your purchasing at Whole Foods.

But within that entertainment space, that's a lot of money that goes out the door to create some of these series here. Are you expecting Amazon-- like some of the other streaming platforms-- to have to look through each of these titles and start to make some tough decisions about which ones that are going to prioritize going forward in the kind of restructuring of costs environment?

NICK JONES: In this environment, absolutely. You have to think about spend on things like that. What's unique about Amazon, though, is that they are a retailer, whereas Netflix is not.