Amazon Earnings: Good Results, With AWS Still a Winner; Fear on Profitability Guidance Is Overblown

Amazon reported strong second-quarter results, with revenue growing 12% year-over-year to $167.6 billion and operating margin expanding to 11.4%, exceeding top and bottom-line guidance. Despite the stock trading down post-earnings due to concerns over AWS margins and mixed profitability guidance influenced by investments like Project Kuiper, Morningstar views this market reaction as an overreaction, finding the shares attractive and raising its fair value estimate to $245, signaling confidence in the company's underlying performance and long-term outlook.

Analysis

Amazon delivered strong second-quarter results, outperforming guidance with revenue growth of 12% year-over-year in constant currency to $167.6 billion and an expansion in operating margin to 11.4% from 9.9% a year prior. The performance was driven by outperformance in online stores, third-party seller services, subscriptions, and particularly impressive advertising growth, which compensated for underperformance in physical stores. Despite these positive results, the stock has traded down, likely due to concerns over a sequential decline in Amazon Web Services (AWS) margins and mixed forward guidance on profitability. However, these fears appear overblown, as the AWS margin pressure is attributed to temporary factors like capacity constraints and is expected to recover. The lighter-than-consensus profitability guidance is also contextualized by specific, planned investments, namely satellite launch costs for Project Kuiper and the ramp-up of new AWS capacity, which are expected to pressure margins for a couple of quarters. Reflecting a belief that the market has overreacted, Morningstar raised its fair value estimate on the stock to $245 from $240, viewing the shares as attractive at their current level.

Key Decisions for Investors

• Investors may view the negative stock reaction as a potential buying opportunity, as it appears to focus on temporary margin pressures while discounting the strong underlying performance, including a 12% revenue beat and operating margin expansion.
• It is critical to monitor AWS margins and profitability over the next several quarters to validate the thesis that the current compression is a result of strategic investments like Project Kuiper and not a structural decline in the segment's earnings power.
• Focus should remain on the robust growth in the high-margin advertising segment, which is a key driver of overall results and provides a significant buffer against near-term investment-related headwinds in other areas.