Why we're keeping our buy rating on Amazon — even as shares tumble after earnings

Amazon delivered strong Q2 results, beating top and bottom-line estimates with revenue up 13% and operating income up 31% year-over-year. However, a modest revenue beat and margin contraction in Amazon Web Services (AWS), coupled with a conservative Q3 operating income outlook, triggered a more than 6% after-hours stock decline. Despite this, Amazon is raising full-year capital expenditure to $117 billion, largely for AWS AI investments, and analysts view the sell-off as a buying opportunity, reiterating the long-term thesis driven by high-margin AWS and advertising growth, and e-commerce cost reduction.

Analysis

Amazon delivered robust second-quarter results, with revenue increasing 13% year-over-year to $167.7 billion and operating income growing 31% to $19.17 billion, both significantly exceeding consensus estimates. Despite the strong headline figures, the market reacted negatively, driving the stock down over 6% after-hours. This was primarily due to a narrow revenue beat from Amazon Web Services (AWS) and a contraction in its operating margin to 32.9% from 35.5% a year prior. AWS revenue grew 17.5% to $30.87 billion, a slight acceleration from Q1 but considered underwhelming compared to recent results from cloud competitors. Furthermore, Amazon's third-quarter operating income guidance, with a midpoint of $18 billion, fell short of the $19.5 billion consensus. However, the underlying fundamentals remain strong. The company's high-margin advertising business saw accelerating growth, and the AWS order backlog grew 25% year-over-year to $195 billion. Operational efficiency in e-commerce is clearly improving, with North American margins expanding and the International segment posting a record operating margin above 4%. Crucially, management is increasing its full-year capital expenditure forecast from $100 billion to approximately $117 billion, signaling strong conviction in future demand for AWS and AI services, despite acknowledging supply constraints related to power and components.

Key Decisions for Investors

• Consider the after-hours price decline as a potential buying opportunity, as the market's focus on AWS margin compression and conservative guidance overlooks the fundamental strength in high-margin advertising growth and improving e-commerce profitability.
• Investors should monitor the growth of the $195 billion AWS backlog and continued margin expansion in retail segments as more reliable indicators of long-term health than quarter-over-quarter comparisons with cloud rivals.
• View the significant increase in planned capital expenditure to $117 billion as a bullish long-term signal of management's confidence in sustained AI-driven demand, despite its dampening effect on near-term operating income guidance.
• Maintain a degree of skepticism towards the conservative Q3 operating income guidance, given the company's documented history of providing a wide range and ultimately delivering results that exceed initial projections.