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Amazon earnings led by ‘accelerating third-party retail revenue growth,’ analyst says

Cowen Managing Director and Senior Equity Research Analyst John Blackledge joins Yahoo Finance Live to discuss Amazon earnings, cloud leadership, supply chain inflation, investor sentiment, and the outlook for Amazon.

Video Transcript


- Shares of Amazon, AMZN, taking a hit after the e-commerce giant reported mixed quarterly results, but it's the company's cloud division getting some buzz as Amazon Web Services growth decelerated while also falling shy of analysts' expectations. To dig in this further, we have John Blackledge, who is the Cowen Managing Director and Senior Equity Research Analyst there.

John, great to have you here with us on the day post earnings for Amazon. Just want to get kind of a broad brush stroke of your take from Amazon.

JOHN BLACKLEDGE: Yeah. I mean, if we look at 4Q and 1Q guide, we'll maybe start there. So 4Q revenue and op income beat, led by accelerating third party retail revenue growth, while AWS growth slightly missed. The 4Q op income of $5.4 billion, X1 time items was above the 0 to 4 billion guide range.

Then for 1Q-- so that was good. So for 1Q, revenue guide range bracketed consensus estimates, despite the macro headwinds and further top line decel at AWS. And then the op income guide of 0 to 4 billion also bracketed street estimates, led by efficiency gains at retail biz offset by AWS softness. So we tweaked estimates, we took the price target up to 150 from 140, maintain, outperform. Amazon shares were up 31% year to date going into last night.

I think they're tracking down 5%. 6% right now. And I think as you guys were mentioning before I got on, I think it was the slight AWS miss, and the guide was a little bit softer. And that offset actually better retail revenue and margins.

- John, is Amazon's leadership position in cloud at risk at all?

JOHN BLACKLEDGE: I don't think so. They are number one. On an incremental basis, in terms of their incremental revenue, it's probably-- I think this year we have incremental revenue of $9 or $10 billion, and that's probably as much or more than Azure and Google Cloud combined.

You know, I think what they said last night was, like a lot of companies we're seeing on the advertising side, too, is the macro is having an impact. Companies are trying to find savings wherever they can, and that includes kind of in public cloud. And I think we had Alphabet Report also as well last night, and Google Cloud's growth was really strong, but it missed what we had.

It was a deceleration. So I think everyone's feeling it, it's just like AWS is the biggest. They're working off the largest base, and they're not immune to kind of various macro headwinds.

- John, are you disappointed that Amazon doesn't appear to be moving quick enough with cutting expense? I'm sure they just had the recent riff for laying people off, but they don't seem to be in the high gear of trying to get their margins up.

JOHN BLACKLEDGE: Yeah, I think it's a great question, and I think everyone was looking for the margin last year and we didn't get it. And we didn't get it for a lot of reasons.

You had a higher labor cost with the head count ads last year, and I'll get to the cuts for this year. Energy inflation, supply chain inflation, doubling the fulfillment network the last two years, all these various investments. As we get into this year, some of those headwinds are going to be tailwinds. We obviously had the headcount cut, 18,000 heads cut.

So I think we'll start to see that as we go through the year. And then the energy and supply chain inflation, that's going to be at their back. And I actually think you saw that kind of show up a little bit in the fourth quarter. Their shipping costs were up about 4%. So that was a pretty big decel.

And obviously we'll see what they do on the capital investment side. We think it's going to be down this year. We have CapEx down mid-teens.

But I understand the question, because I think Meta came out and they said, hey, our OpEx and our CapEx are going to here and here, and it was lower than their prior guide. Whereas Amazon and actually Alphabet didn't give that O quantify, kind of the cost savings. But when I talked to them after the call last night, they're like hey, we're making surgical cuts here. We're doing headcount cuts, we're streamlining as much as we can.

And I think it'll show up as we get through the year, but as we kind of said like that 1Q guide was-- the op income guide was solid, but after the fourth quarter op income number I think investors were also a little bit disappointed.

- John, just to go back to Cloud for one second, not just at Amazon but but overall, when do you think the-- like how long do you think this sort of dip in spending on the part of clients is going to last?

JOHN BLACKLEDGE: Yeah it's a great question. We struggled a little bit modeling it out last night for both Amazon and Alphabet, but we basically think it's going to-- we have the decel in 1Q-- I'll just take AWS for example-- a further decel in 2Q. Which I kind of feel like they didn't say that, because they don't really guide Amazon, but that's what I thought the messaging was. And then kind of stabilizing, and then maybe tick up maybe towards the end of the year.

But it will obviously be dependent on the macro. If the macro gets worse, then it'll probably be lower. But I would say, and we didn't get this number last night, but they do put it in their filings, that they said the backlog at AWS is strong, and so we'll wait to see that number. But yeah, it's a little bit TBD, to be honest with you.

- Hey John, just quickly. Is there anything that could trigger supercycle type of upgrade for that cloud services division? And I use that supercycle kind of analogy just to kind of pare back to what we may be used to, even within Apple on the product side.

JOHN BLACKLEDGE: I mean-- they're always introducing new products and services, and I think governing the growth trajectory this year is the macro. And not to get away from your question, but the AWS, for example, their product cycle is it's kind of like a virtuous cycle. They lead with their infrastructure services and then customers tend to need things and then that helps them with product ideas, and it leads to this virtuous cycle.

And so they're always innovating, as is GCP at Alphabet and Azure. But moreso, I think it's more, at least for this year, probably more macro oriented as it relates to going back to the numbers and trajectory for the businesses.

- John Blackledge, Cowen Managing Director and Senior Equity Research Analyst, it's good to see you. Have a good weekend.

JOHN BLACKLEDGE: Thank you, you too.