Amazon (NASDAQ:AMZN) stock reacted positively to the firm’s Q1 earnings report on Wednesday (29 April). And there was a lot to like.
It’s one of the largest investments in my Stocks and Shares ISA. But should I be concerned about declining free cash flows?
Results
Amazon delivered on sales and profits in Q1. It also delivered me a new ice cream scoop after I put my one in the dishwasher. That last bit is neither here nor there. But 17% sales growth and a 74.8% increase in earnings per share are very important.
The company’s net income was boosted by a revaluation of its stake in Anthropic. So that’s not likely to be ongoing, but I’ll come back to this.
With Amazon, it makes a big difference which parts of the firm are growing the fastest. And the Q1 report is terrific on this front. The outstanding divisions were Advertising (+22%) and Amazon Web Services (AWS +28%). These come with high margins, but they matter for another reason.
For AWS, the quarter marked growth getting stronger. And this is extremely important in the current environment.
AWS
Amazon has been spending heavily on data centres and it looks set to keep going. And investors have been wary about this. I think they’re right to be cautious. Even if demand’s strong, there are a number of other obstacles in the way of earning a return.
A major one is power. Data centres take a lot of electricity and this is causing a number of US states to consider imposing a moratorium on new builds. On top of this, there are supply chain challenges. Things like memory have become much more expensive as demand has soared.
That’s why AWS growing at its fastest rate for four years is so important. It’s a sign that Amazon’s spending is working – at least, for now.
That’s why the stock is rising. And I think the stock market’s response to the company’s latest earnings is the right one.
Amazon’s DNA
Amazon is investing heavily in artificial intelligence (AI). Not just in terms of building data centres, but also by designing its own chips. The costs involved are huge. But being fearless and looking for the next big opportunities is central to the type of company Amazon is.
When it goes wrong, it can go really wrong. The company’s investment in Rivian Automotive was a mistake that sent 2022’s earnings negative.
When it works, however, the results can be spectacular. And there’s no better illustration of this than the recent boost to the firm’s stake in Anthropic.
Obviously, it would be great to have all the successes without the failures. But that isn’t realistic, so investors have to choose between neither or both. A lot of this comes down to the firm’s management. And my view is very positive – so what should my next move be?
What I’m doing
A lot of the time, the best thing to do is to be patient. And that’s what I’m doing with Amazon. The stock’s a big part of my portfolio, so I’m not looking to buy right now. But others who don’t have this issue might be interested to do further research.
