Company Updates: Amazon and CPKC
- By Christopher De Sousa, CIM® | Portfolio Manager
- 4 Min Read
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AMAZON
Amazon reported an increase in first-quarter revenue of 13% to $143.3 billion, driven by strong operational performance across all major business segments (e.g., retail, advertising, subscriptions, and cloud computing). Amazon delivered a record-high operating profit of $15.3 billion, up 221% from the prior year, and $3.8 billion above the high end of the company’s guidance range. Cash flow and profitability continue to inflect higher as we have anticipated. Amazon recorded the highest ever operating profit margin of 10.7% and topping the previous high of 8.2% set in the first quarter of 2021.
In our view, Amazon is just beginning to see the fruits of its labour. North American retail (e-commerce) operating margins improved to 5.8% (vs. +1.2% in the prior year), whereas international retail soared to 2.8% (vs. -4.3%). Amazon expects it can lower costs even further across the retail business while increasing fulfillment and delivering speeds by regionalizing operations globally. Not only is this bullish from a profitability standpoint, but the ability to provide same or next day delivery further strengthens Amazon’s value proposition to attract new customers and third-party merchants.
AWS—Amazon’s $100 billion-plus cloud business—accelerated sequentially and grew 17.2% to $25 billion (up 4 percentage points from Q4) and delivered record-high operating profit margins of 37.6% (up 8 percentage points from Q4). AWS continues to see a growing demand for cloud services as well as Generative AI (GenAI) and non-GenAI workloads. GenAI has already evolved into a multi-billion-dollar revenue run-rate business (vs. Microsoft’s Azure at $4 billion annualized run-rate). AWS customers are signing up for longer deals as well as making more substantial commitments.
Our perspective is that there’s a large and untapped revenue source for AWS and other cloud service providers, given that over 85% of worldwide IT spending is still directed towards on-premises solutions. But the transition to the cloud won’t occur overnight. Amazon expects a gradual migration of on-premises spending to the cloud, as businesses upgrade and modernize their IT infrastructure. It’s important to note that this comes before the GenAI opportunity. Amazon projects that all GenAI workloads will be developed in the cloud over the next decade or more. AWS is at the heart of this fundamental shift to the cloud. Several GenAI models are being built and trained on the AWS cloud as well as AWS Trainium—a machine learning chip designed for training large-scale deep-learning models. We’re still in the early stages of the broader cloud and GenAI narrative.
There’s a number of fundamental catalysts we’re actively monitoring, including 1) Amazon’s retail segment, which is beginning to generate substantial profits and cash flow, 2) AWS growth from both cloud migrations and GenAI, and 3) the fast-growing advertising business (up 24% in the quarter) driven by sponsored ads as well as the roll-out of Prime Video ads—a new source of high margin revenue.
CANADIAN PACIFIC KANSAS CITY
Canadian Pacific Kansas City (CPKC) is the merger of Canadian Pacific and Kansas City Southern—the first and only single-line railway with a direct route connecting Canada, the United States, and Mexico. In the first quarter, CPKC grew revenue by 55% to $3.5 billion, primarily attributable to the acquisition of Kansas City Southern. On a combined basis, revenue grew 2%. Volume growth, measured in revenue ton-miles, rose by 1%, driven by longer length-of-haul traffic growth across the integrated network.
CPKC is currently in the early stages of optimizing longer length-of-haul traffic across its transnational rail network. This involves strategically shifting existing carloads from short distances to more extended routes. In the current second quarter, revenue ton-miles have already increased by 8% compared to the same period last year. The transition from short to long-haul lanes will continue as additional capacity becomes available from exiting lower-margin short hauls running between Mexico and the border.
CPKC reiterated its guidance for high-single digit revenue growth and double-digit earnings per share growth over the next five years. We maintain our view that CPKC is strategically positioned to realize this growth trajectory, particularly as they leverage the synergies of the recent merger as well as offer highly competitive shipping alternatives to customers, such as converting trucks to rail and cross-border hauls. We identify pricing growth as a potential revenue tailwind in the coming months. CPKC is focused on repricing a number of legacy contracts from Kansas City Southern as they come up for renewal.
CPKC and CN Rail may be subject to a potential strike organized by the Teamsters Canada Rail Conference (TCRC)—a labour union that represents more than 9,000 employees at CPKC and CN Rail in Canada. The earliest the strike could legally occur is May 22. Historically, labour disputes in Canada have been relatively short-lived. For instance, in 2019, TCRC members at CN Rail were on strike for a duration of eight days before reaching an agreement.
We are closely monitoring this event. However, it does not change our view that CPKC is a high-quality rail operator with a long runway for growth. We think the KCS acquisition will unlock substantial long-term value for both customers and patient shareholders.