Amazon: Multiple Margin Levers Drive Earnings Growth

Summary:

• Pricing discounts to drive volume growth in Q3 FY24’s discounts season have masked the benefits of lower freight costs. However, I expect this to improve gross margins in future quarters.
• AWS is enjoying strong operating leverage effects driven by prudent hiring practices, cost efficiencies and the combination of growth and high incremental EBIT margins.
• Amazon stock is attractively valued, and its run up is wholly due to EPS upgrades. This makes it an ideal GARP stock.
• Technicals relative to the market point toward continued outperformance ahead vs. the S&P 500 as the ratio prices look ready to march upwards following a false downside breakout and consolidation.
• Robotics in fulfillment centers are a key monitorable for meaningful gross margin accretion of 25%. To gauge whether there is edge or alpha in this thesis, I am tracking margin surprises vs. consensus expectations.

Performance Assessment

My last ‘Buy’ view on Amazon (NASDAQ:AMZN) has been playing out well so far as it has outperformed the S&P 500 (SPY) (SPX) (IVV) (VOO):

I think this is still in the early innings, as there’s plenty

Analyst’s Disclosure: I/we have a beneficial long position in the shares of AMZN, VOO either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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