Should you buy Amazon stock after its Q1 earnings report?

Amazon.com Inc (NASDAQ: AMZN) is down nearly 4.0% on Friday after warning of continued deceleration in cloud revenue.

Analyst shares his view on Amazon stock

Last night, CFO Brian Olsavsky said that revenue in Amazon Web Services grew this month at a pace that lagged the Q1 by 500 basis points as customers remained wary of spending in the face of a slowing economy.

AWS took a sizable hit to operating margin in the recently concluded quarter as well. Operating income from the cloud segment tanked 22% to $5.1 billion. In comparison, analysts had called for $5.36 billion.

But none of it was sufficient to turn Mizuho analyst James Lee any less bullish on Amazon stock. On CNBC’s “Squawk on the Street”, he said:

Even though with deceleration into next quarter, we’re projecting about 10% growth in AWS. We’re pretty close to the trough, with potential recovery towards the end of the year.

On the revenue side, Amazon Web Services already came in well ahead of last year and topped Street estimates as well.

Amazon’s outlook for its current quarter

For Q2, Amazon guided for its operating income to fall between $2.0 billion and $5.5 billion on up to $133 billion in sales. Lee added:

Amazon runs a consumption mode. So, in a down cycle, you’ll have a double negative in terms of pricing and volume. But when the economy starts to rebound, we’ll see that translate into Amazon’s revenue growth.

Part of the weakness this quarter, as per the tech behemoth, was attributed to costs related to the layoffs as well. In March, Amazon revealed plans of cutting another 9,000 jobs. Turning leaner could also be a tailwind for this Nasdaq-listed firm.

Year-to-date, Amazon shares are still up more than 20%.

Advertising and retail did well in the first quarter

Ad sales in Q1 went up more than 20% in the first quarter to $9.51 billion despite fears of a slowdown in advertising. Remember that advertising is an extremely high margin business for Amazon.

Interestingly, the retail business also factored into Lee’s bullish view on Amazon stock.

Fundamentals are positive in retail business. They did a really good job in expanding margins of retail by driving efficiency on their fulfilment centres. At the same time, they’re cutting headcount as well.

In the U.S., Amazon generated $76.88 billion in sales on $900 million of profit from its eCommerce business. Overseas operations, though, remained in loss.

Key takeaways from Amazon Q1 earnings report

• Earned $3.17 billion that translates to 31 cents a share
• That compared top 38 cents a share of loss last year
• Revenue climbed 10% year-on-year to $127.4 billion
• Consensus was 21 cents a share on $124.6 billion revenue

Following the earnings press release, Mizuho’s Lee raised his price target on Amazon shares to $145 that suggests a near 40% upside from here.

Valuation right now is not very stretched. Traditionally, we see Amazon in the range of mid-to-high-teens (EV/EBITDA multiple). At the current price, you’re probably trading around 10 times forward.

Amazon is well-positioned to capitalise on the AI mania

Earlier this month, Amazon.com Inc expanded its footprint in generative AI with the launch of “Bedrock” (read more).

While the management did not offer a headline worthy update on artificial intelligence on its earnings call last night, Lee sees the company’s positioning in this space as another potential reason to own Amazon stock.  

They’re using their own chips to process generative AI that means unit economic could be much better than peers. They’re allowing enterprise in AWS to run their large language models so they could pass cost savings to clients, and they can use large language models to enhance applications of Alexa.

You can find the full Amazon Q1 earnings report HERE.