Amazon Q1 24 – Picks and shovels.

All roads lead to Nvidia.

• Amazon reported good results that were led by AWS as appending on AI has reignited growth, but capex is growing to support these massive models and the main beneficiary remains Nvidia.
• Q1 24 revenues / EPS were $143.3bn / $0.98 ahead of estimates of $142.7bn / $0.84 and guidance for the coming quarter was broadly in line with estimates.
• All of the action was to be found at AWS where revenue growth accelerated to 17% YoY up from 13% YoY in Q4 23 and revenues came in at $25bn ahead of estimates of $24bn.
• Given the jump at both Microsoft Azure and Google Cloud, I was expecting a bigger jump, but it is important to remember that Amazon is by far the biggest and so big growth is much harder to come by.
• However, it does underline my ongoing concerns with regard to Amazon’s prowess in AI which has been pretty poor for some considerable time.
• Its lack of expertise is evidenced by its need to invest in Anthropic which I suspect it will end up acquiring in order to give itself a competitive offering in generative AI.
• Looking at the acceleration enjoyed by both Microsoft and Google both of whom can lay a much better claim to AI expertise, it looks to me like Amazon is missing out somewhat in the AI boom and that it has a lot of work to do.
• Microsoft stated that 7% points of the growth that it saw in FQ3 24 was due to generative AI while Amazon did not offer a breakdown as I suspect that its number would not have been nearly as good.
• This is why the company had to fall back on the “we are the most secure option” in its commentary as the phrase “we are the best at AI” simply does not hold water.
• Crucially, it does not have to be the best at AI, as all it really needs to do is provide the best infrastructure for customers to use, but Nvidia is more than happy to sell this to anyone that wants it outside of China.
• This means that expertise in AI will have an impact on where customers go as Nvidia is levelling the playing field.
• Providing this infrastructure is becoming expensive and Amazon said that capex will increase “meaningfully” from the $14.9bn that it spent in Q1 24.
• On the e-commerce side of the business, Amazon is continuing its focus on efficiency (unlike Meta) and this was evidenced in its profitability which looks set to continue for the rest of the year.
• At the moment, investors are most excited about AI and with Amazon remaining a laggard and a 2024 PER multiple of 42x, this is one I would continue to avoid.
• Nvidia on the other hand is not as expensive and is the undisputed king of AI.
• Nvidia is on 2024 PER of 35x, which is expensive but if I were forced to choose between the two for 2024, Nvidia would win hands down.
• I still think there is room for Nvidia to rise but the easy money has already been made and so there is probably greater upside in companies that have exposure but are yet to see the revenue (e.g. Qualcomm) or have simply been overlooked.
• I have a position in Qualcomm that I am very happy to sit on.