Amazon Infrastructure Investment: spending on technology infrastructure is increasing, related to the expansion of servers, network equipment, and data centers
AMAZON.COM, INC. announced unaudited financial results for the third quarter and full nine months ended September 30, 2024. The results showed solid year over year revenue growth, particularly in AWS (Amazon Web Services).
Total sales for the third quarter were $158.877 billion, up 11% from $143.083 billion in the same period last year. For the nine-month period in total, sales reached $405.167 billion, a similar 11% growth from $404.824 billion in the same period last year. By region, North America accounted for 60% of sales, with the international sector accounting for 22% and AWS 18%. In particular, AWS sales grew 19% y/y and 18% for the nine months in total.
Operating Profit Expansion
Operating income totaled $17.411 billion in the third quarter and $47.394 billion in the first nine months of the year, representing increases of 57% and 99%, respectively, over the same period last year. The increase in sales and advertising revenues were the main contributors, especially the significant growth in AWS’ operating income. Another major factor was the elimination of the operating loss in the international division, which turned profitable.
Healthy Cash Flow
Cash flow from operating activities totaled $25,907 million in the third quarter and $112.2 billion for the full nine months, up 7% and 28%, respectively, from the same period last year. This was due to an increase in net income and an improvement in working capital. On the other hand, investing activities used cash flow of $16.9 billion in the third quarter and $69.5 billion for the nine months, due to capital expenditures and purchases of marketable securities. Financing activities resulted in cash outflows of $2.8 billion in the third quarter and $152.5 billion for the nine months in total, due to debt repayment and redemption of long-term debt.
StrengtheningFinancialCondition
Cash and cash equivalents and restricted cash at closing totaled $980.51 million, up from $867.8 million in the same period last year. Shareholders’ equity also increased significantly to $259.151 billion from $201.873 billion in the same period last year, strengthening the company’s financial position.
Investment and Legal Risks
Amazon continues to invest in Rivian (Rivian Automotive, Inc.), in which it currently holds a 16% stake. However, several patent infringement and antitrust lawsuits are pending, and there are many uncertainties regarding the impact of these lawsuits on the company’s performance. The situation calls for a cautious response.
Future Outlook
Amazon forecasts Q4 2024 sales of $181.5 billion to $188.5 billion and operating income of $16 billion to $20 billion. This forecast takes into account the impact of currency fluctuations and is subject to change depending on economic conditions and market trends.
In general, Amazon is experiencing solid growth in both revenue and operating profit, with the growth of its cloud services division, AWS, in particular, driving overall company performance. However, a prudent response to legal risks and volatile market conditions is expected to be a challenge going forward.
Interest Rate Risk
Amazon’s long-term debt is carried at amortized cost, and changes in interest rates do not directly affect the consolidated financial statements. However, the fair value of long-term debt that pays interest at a fixed rate will fluctuate with interest rate trends. When interest rates decrease, the fair value of the debt increases; conversely, when interest rates increase, the fair value of the debt decreases. Amazon invests excess cash in AAA-rated money market funds and investment grade short- and medium-term marketable debt securities, and there is a risk that the market value of these securities may decline as interest rates rise.
Foreign Exchange Risk
In the third quarter of 2024, net sales from the international sector represented 23% of consolidated sales. Sales and related expenses from international outlets, including Canada and Mexico, are recorded in local currencies, primarily euros, pounds sterling, and yen. Fluctuations in foreign exchange rates could cause sales and operating results to differ significantly from expectations, and the re-measurement of intercompany balances could result in significant gains or losses. For example, compared to the same period last year, net sales in the international division decreased by $46 million in the third quarter. In addition, foreign exchange fluctuations of 5%, 10%, and 20% are expected to result in decreases of $975 million, $1.9 billion, and $3.9 billion, respectively, compared to the foreign fund balance of $1.95 billion as of September 30.
INCREASING REVENUE AND PROFIT: The AWS segment has achieved revenue growth of 19% and 18% for the third quarter and full year of 2024, respectively, with a significant increase in operating income. This is primarily due to increased demand for cloud services and price adjustments from long-term contracts.
Infrastructure Investment: spending on technology infrastructure is increasing, related to the expansion of servers, network equipment, and data centers to support AWS’ business growth. By extending the useful life of servers from 5 to 6 years, we are reducing depreciation costs and improving profitability.
Company-wide technology investments
Research and Development (R&D): Investments in technology and infrastructure include the development of new products and services, improvements to existing online and physical stores, as well as satellite networks and autonomous vehicles. In this way, we aim to enhance the customer experience and improve operational efficiency.
2. expanding and streamlining the logistics network
Fulfillment (Logistics)
Network Expansion: Expansion of fulfillment centers and physical stores to ensure faster delivery to customers and handle increased sales volume.
Cost control: Increased logistics costs associated with higher sales volume are partially offset by increased efficiencies. This includes reducing transportation costs and optimizing operations.
3. strategic investments and acquisitions
Investment in Rivian Automotive, Inc.
Entry into the Electric Vehicle (EV) segment: Amazon is demonstrating its aggressive entry into the electric vehicle market through its approximately 16% stake in Rivian. By doing so, the company aims to electrify its own logistics and delivery network, as well as create a sustainable business model.
Investment in Anthropic
Investment in AI Technology: $1.25 billion and $2.75 billion were invested in convertible bonds to Anthropic in Q3 2023 and Q1 2024, respectively. This is considered a strategic move to advance the sophistication of artificial intelligence technology and expand its range of applications.
Acquisition of 1Life Healthcare, Inc.(One Medical)
Expansion into Healthcare: with its cash acquisition of 1Life Healthcare, Inc.(One Medical) in 2023, Amazon is strengthening its presence in the healthcare services sector. Through this acquisition, Amazon aims to attract new customer segments and diversify its business through the provision of healthcare services.
4. financial strategy and capital management
Stock repurchase program
Shareholder Return: We are returning capital to shareholders through a $10 billion share repurchase program approved in 2022, with $6.1 billion unused as of September 30, 2024, to stabilize our stock price and increase shareholder value in the future.
Debt Management
Balancing Long- and Short-Term Debt: Amazon manages a diverse range of long-term and short-term debt, with $54.89 billion in long-term debt as of September 30, 2024. This is being used to finance growth investments and acquisitions.
Leveraging the Low Interest Rate Environment: By leveraging low interest rate debt, Amazon is able to invest for growth while keeping its cost of capital low.
