Amazon earnings: Why the stock is sinking

Amazon Q4 Earnings Report Analysis

Key Concepts:

• AWS (Amazon Web Services): Amazon’s cloud computing subsidiary, a major revenue driver.
• Capex (Capital Expenditure): Funds used by a company to acquire, upgrade, and maintain physical assets.
• Hyperscalers: Companies that provide massive scale cloud computing infrastructure (Amazon, Microsoft, Google, Meta).
• ROI (Return on Investment): The profitability of an investment.
• Compute: The computational resources available to process data, crucial for AI development.
• Moat: A company’s sustainable competitive advantage.
• Tranium: Amazon’s internally developed AI chips.
• Azure: Microsoft’s cloud computing platform.
• Google Cloud: Google’s cloud computing platform.

I. Financial Results – Q4 2023

Amazon’s Q4 results were released, initially causing an 8% stock drop. Key figures include:

• Q4 EPS (Earnings Per Share): $1.95 (vs. Street estimate of $1.96)
• Q4 Net Sales: $213.39 billion (vs. Street estimate of $211.49 billion)
• Q4 AWS Net Sales: $35.58 billion (up 24% YoY, vs. Street estimate of $34.88 billion)
• Q4 Operating Margins: 11.7% (in line with Street expectations)
• Q4 North American Net Sales: $127.08 billion (in line with Street consensus of $127.08 billion)

Despite slightly missing EPS estimates, net sales exceeded expectations, and AWS growth was stronger than anticipated.

II. Q1 2024 Guidance & 2026 Capex Forecast

The primary driver of the stock’s initial decline was Amazon’s forward-looking guidance and, particularly, its substantial capital expenditure (Capex) forecast:

• Q1 2024 Net Sales Guidance: $173.5 - $178.5 billion (vs. Street estimate of $175.54 billion)
• 2026 Capex Forecast: $200 billion (significantly higher than the previous estimate of $146.1 billion)

This $200 billion Capex projection, following Alphabet’s announcement of up to $185 billion in Capex, sparked investor concern about potential margin compression.

III. Context & Market Sentiment

Prior to the earnings release, Amazon’s stock had already experienced a 5% decline over the past 12 months. Some analysts had viewed this as a buying opportunity, citing a discount compared to peers and optimism surrounding AWS’s return to AI investment. Despite 95% of analysts maintaining a “buy” rating on the stock, the initial market reaction was negative, indicating investor skepticism regarding the guidance and Capex plans.

IV. Analysis of Capex & AI Demand

The discussion centered heavily on the implications of the increased Capex. Aroon highlights that the increase is substantial – a 50% jump from 2025, which itself was a 60% increase from 2024. The consensus is that Amazon, like other hyperscalers, is aggressively investing to meet surging demand for AI compute.

Dan emphasizes that analyst Capex estimates have consistently underestimated actual spending in recent years. He argues that the hyperscalers are in a competitive race for compute capacity, viewing it as a crucial “moat” for long-term market dominance. He points to Nvidia’s A100 GPU remaining at 100% demand with rising spot prices as evidence of sustained high demand. He also notes that Amazon’s previous underspending on infrastructure contributed to Adam Selipsky’s departure as AWS CEO.

V. Beneficiaries of Increased Capex

Dan identifies several companies poised to benefit from the increased spending on compute infrastructure:

• Nvidia: The primary supplier of GPUs.
• Broadcom: Benefiting from the development of custom silicon.
• Micron: A major memory chip manufacturer.
• TSMC: A leading semiconductor foundry.
• Semiconductor Equipment Manufacturers: Companies providing tools for chip production.

VI. AWS Performance & Future Growth

Aroon emphasizes the positive aspect of AWS’s accelerating growth, reporting a 24% increase in net sales, exceeding the expected 21-22%. He suggests that continued AWS growth and maintaining healthy margins (currently around mid-30%, with potential to exceed 40%) are key metrics to watch for assessing the effectiveness of the increased Capex.

VII. Amazon’s Long-Term Outlook & Competitive Position

Aroon believes Amazon’s long-term prospects remain strong, projecting potential revenue exceeding $1 trillion within 5-10 years. He highlights the increasing contribution of higher-margin businesses like AWS and advertising to overall profitability.

Dan argues that while Amazon may have initially lagged behind competitors like Microsoft Azure and Google Cloud in the AI race, it is now making significant progress, particularly with its Tranium chips and increased Nvidia capacity. He also points to Amazon’s potential to leverage AI across its entire business, including retail, advertising, robotics, and delivery, to drive margin expansion.

VIII. Risks & Investor Considerations

Aroon identifies the primary risk as the high Street consensus forecasts, placing pressure on Amazon to consistently deliver strong results.

Dan notes that while the hyperscalers’ spending may be justified in the long term, short-term investor reactions could be negative due to concerns about margin pressure. He cautions against indiscriminate selling, suggesting that the underlying demand for compute remains strong.

Notable Quotes:

• Dan Ives: “Every capex estimate that's come from analysts over the last few years has underestimated what is required.”
• Dan Ives: “Compute is going to be the moat in terms of these companies being able to sustain their market advantages over the long term.”
• Dan Ives: “Amazon knows this better than any because Adam Selipsky’s job was basically to get this right when he didn't get enough Nvidia into AWS early enough.”
• Aroon: “We still have a strong buy rating… predicated on on Amazon's margin uh trajectory.”

Conclusion:

Amazon’s Q4 earnings report revealed a company with strong underlying performance, particularly in AWS, but facing significant investment requirements to capitalize on the burgeoning AI market. The $200 billion Capex forecast, while substantial, is viewed by some analysts as a necessary investment to secure long-term competitive advantage. Investors are closely monitoring AWS growth, margin preservation, and the return on investment from these substantial capital expenditures. The overall outlook remains positive, with expectations for continued revenue growth and margin expansion driven by the increasing contribution of high-margin businesses and the integration of AI across Amazon’s diverse operations.