Amazon’s ‘cloud business is still holding up’ against Microsoft, Google competition: Analyst

CFRA Analyst Tuna Amobi joins Yahoo Finance Live to discuss Amazon’s earnings beating estimates and its price increase for Prime members.

Video Transcript

AKIKO FUJITA: Let’s turn our attention to shares of Amazon soaring today, up about 12% here on the back of the company’s fourth quarter results. The e-commerce giant actually reported its slowest revenue growth in more than four years, but it also announced an increase in its Prime membership fee for the third time to $139 a year. That is expected to help cushion some of the rising labor and supply chain costs. Amazon CFO Brian Olsavsky addressed those challenges Amazon’s facing on the earnings call.

BRIAN OLSAVSKY: There’s cost pressure in Q1. I think the good news is that the labor were– that labor challenge is not as great in Q1 as it is in Q4– Q3 and Q4. So we’re hopeful on that. We have to work to now make our operations more efficient as we get staffing levels up. And we’re going to plow a lot of our effort into increasing our transportation speeds and beating our pre-pandemic levels. So there’s a lot of different challenges going on right now.

AKIKO FUJITA: Let’s bring in Tuna Amobi, CFRA analyst, to break this down for us. Tuna, let’s talk about the stock move today, up about 12% right now. I mean, how much of this is really just kind of a relief rally after the week we’ve had? Amazon’s numbers were not great if you’re talking specifically about the e-commerce side. And yet, we did hear Brian Olsavsky there talking about how they plan to work the numbers here in the face of price pressures.

TUNA AMOBI: Hi, Akiko. No, I think you’re absolutely right. Going into the quarter, the expectations were very, very tempered. You know, the supply chain and inflationary pressures were going to be the dominant theme. But as you just kind of played back Andy Jassy’s comments, it’s kind of pleasing to hear that those pressures are starting to ease.

But I think the major takeaway, Akiko, from this quarter is that the cloud business is still holding up extremely well in the face of competition from Microsoft and Google. And also the transparency that we are now getting on the advertising business, I see that business growing 32%, which is really a far cry from what we’ve heard from some of the other tech companies, like Facebook.

So ultimately, I think if you’re an Amazon shareholder, you’ve got to be happy with the report overall. The sky is not falling. The company’s been navigating these pressures as well as you can hope at this point. Not to say that they are out of the woods yet, but ultimately, I think this report sets them up, in our view, for another year of strong growth and momentum on the heels of the pandemic.

AKIKO FUJITA: Tuna, let me pick up on that point about advertising because that’s one that a lot of investors have been watching to see if they can, in fact, make inroads as a very strong number three. Yesterday, we saw Meta really reliant on the iOS ecosystem. Talk about the big pullback they saw on the back of that. Are we seeing a lot of movement towards Amazon? Or how do you think this benefits or sets things up for Amazon when we look about the declines we’ve seen on the other side?

TUNA AMOBI: Well, you know, Amazon is still a distant third player in the digital advertising market, you know, behind Google and Meta. But, you know, the trends are going in the right direction, right? I think what they’ve done is to really ramp up, you know, that business significantly. And I think what we kind of like is the fact that the growth is really not just concentrated in any one geography. They’re doing a lot of things internationally as well. But it’s a brutally competitive market, as you can imagine.

But the good news is that the digital advertising has been a major beneficiary of the secular trends that were already on the way before the pandemic and have been accelerated significantly during the pandemic. So if anything, we’re still seeing that there’s a tremendous amount of runway for Amazon to continue to chip away. But the pie certainly is big enough for the top three players over the long-term to continue to grow.

BRIAN CHEUNG: Tuna, it’s Brian Cheung here. It’s great to speak with you. I wanted to ask about the other revenue stream, their bread and butter of the Amazon Prime Services that they offer. Increasing the price from $119 to $139 on an annual basis is pretty notable. How important is that? Because when you look at the bottom line earnings, people thought it was a mistake or a typo on their bottom line net income and earnings per share. So is this to get ahead of more price pressures from a labor cost standpoint or to cover the increased costs that they’ve already sustained on the books?

TUNA AMOBI: You know, it’s a little bit of both, right? But this is a third time, Brian, that they are doing this price increase. The last one was in four years ago. So it seems like every four years, they’re able to kind of throw this price increase. But I would argue that this time around, you know, if you’re a Prime member, the value that you get has never been more compelling, you know, whether it’s in the content that they’ve been rolling out aggressively, sports, et cetera.

And also the transition to same-day delivery, which they’re now rolling out in several dozens of cities and which I think could very well be another game changer, as we saw in the one-day delivery. So, you know, the pricing power, in our view, can accommodate this price increase, much like– as much as it’s kind of, you know, fairly steep, but it’s pretty consistent with what they’ve done in the past.

And we think that this price increase could drop anywhere north of $2 billion or 2 and 1/2, almost to the bottom line. So it’s definitely going to provide them some cushion to continue to invest aggressively across the underlying business. And so I just feel like the timing seems quite right based on everything else that’s going on within that Prime membership base.

AKIKO FUJITA: Tuna, from a Prime member standpoint, what do you think the pain point is? $139 is pretty steep when you think about where it used to be. At what point do customers start to reconsider their membership?

TUNA AMOBI: That’s a great point, Akiko. When you do these kinds of increases, you never really know what impact it might have on subscriber acquisition and retention. But if history is any guide for Amazon, I do think that they are as well positioned to be able to contain any potential, you know, fallout, you know? And I don’t anticipate any major fallout.

And remember, this price increase is just in the US. They haven’t even scratched the surface internationally. And the reason is that the dynamics of various markets are pretty different. I expect that they’re going to be looking at that pretty closely as well. But it is something to be very, very careful, Akiko, as you alluded to, because if it’s not done right, it has the potential to really precipitate a lot of customer defections. But in this case, it just seems very, very warranted, based on the investments, the heavy investment cycle that they’re in right now.

BRIAN CHEUNG: All right, we’ll see some interesting earnings reports to come in the quarters ahead for sure. Tuna Amobi, CFRA analyst, thanks again for stopping by. Have a great weekend.

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