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

CNBC

6 days ago

Amazon on Thursday delivered better-than-expected results on both the top and bottom lines for the second quarter. But a small revenue beat from Amazon Web Services and mixed third-quarter guidance weren't enough to impress investors, knocking the stock down after hours. Revenue increased 13% year over year to $167.7 billion, beating expectations for $162.09 billion, according to estimates compiled by LSEG. Earnings per share based on generally accepted accounting principles (GAAP) increased to $1.68, compared with $1.26 last year and the $1.33 estimate, per LSEG. Operating income increased 31% over last year to $19.17 billion, beating the $16.87 billion consensus forecast. Bottom line The market will nitpick a couple of areas in the quarter over the next few days, including questioning why AWS didn't deliver the same type of revenue upside as rivals Microsoft Azure and Google Cloud. The criticism is fair, but we don't see it as a sign that AWS is losing out on the AI race. And while the company's guidance for operating income didn't live up to expectations, management is known for providing a wide range and beating initial projections. Therefore, we urge caution in reading too deeply into the light outlook when the company is projecting another quarter of healthy revenue growth. Most importantly, the thesis on Amazon is unchanged. The drivers we look at to determine the long-term direction of the stock are revenue growth from AWS and advertising — the two high-margin revenue streams. Both were above expectations. Online stores are also important, but our focus there is on management's ability to further lower the cost of serving customers. If there are opportunities to bring costs down, which there are, margins should continue to expand. And as we've said before, if margins are going higher, the stock price follow. As a result, we view Thursday's sell-off — shares are down more than 6% in after-hours trading, giving back all of its year-to-date gains — as a buying opportunity. We're reiterating our 1 rating and increasing our price target to $250 from $240. AMZN 1Y mountain AMZN 1 year return Commentary Revenue at cloud unit Amazon Web Services (AWS) increased 17.5% year over year to $30.87 billion. It's a tiny beat of about $91 million versus the consensus estimate. The growth rate was also a little faster than the 16.9% rate in the first quarter. The upside here wasn't as eye-popping as what Microsoft Azure reported on Wednesday , leading to some disappointment. Once again, management said its AI cloud business — which was reaffirmed as being a multi-billion-dollar business growing annually at a percentage rate in the triple digits — had enough supply to keep up with demand. In the post-earnings call with investors, Amazon CEO Andy Jassy pointed to several areas facing supply constraints, but emphasized that the biggest challenge at the moment is access to power. This helps explain why shares of GE Vernova , one of the largest manufacturers of gas turbines in the world, have doubled this year. Other areas of constraint are chips and components to make the servers. Jassy said it will take several quarters to resolve these shortages, echoing what Microsoft's Amy Hood said on Wednesday. AWS finished the quarter with a backlog of $195 billion. That's up 25% year over year and about $6 billion from the first quarter. But margins from the cloud computing segment were disappointing, too. After nearing 40% in the first quarter, operating margin came back to earth and settled at 32.9% in the second quarter. That's down from both the consensus forecast and last year's result of 35.5%. The company cited a seasonal step up in stock-based compensation costs, higher depreciation expense, and FX rates as reasons for the margin decline from last year. It was revenue beats across the board for the rest of the company's business segments. Some of the notable outperformances were in online stores, which beat estimates by $2.5 billion, third-party seller services, and a revenue growth acceleration in the high-margin advertising services business. Jassy shot down some of the recent reporting that said prices have increased on the e-commerce platform as a result of tariffs. "There continues to be a lot of noise about the impact that tariffs will have on retail prices and consumption. Much of it thus far has been wrong and misreported," he said. "As we said before, it's impossible to know what will happen." "But what we can share is what we've seen thus far, which is that through the first half of the year, we haven't yet seen diminishing demand nor prices meaningfully appreciating," Jassy added. Amazon Why we own it : Amazon may be widely known for online shopping, but its cloud business is the real breadwinner. Advertising is another fast-growing business with high margins. Investment in robust e-commerce logistics infrastructure makes its online storefront the place to be as management works to aggressively decrease delivery times and reduce overall costs. Prime leverages free shipping and video streaming with tons of other perks to keep users paying every month. Competitors : Walmart , Target , Microsoft and Alphabet Most recent buy : April 15, 2025 Initiated : February 2018 By geography, North America sales increased 11% and operating margins expanded 189 basis points from last year to 7.5%. In the international segment, Amazon's revenue increased 16%, but operating income surged thanks to a material increase in operating margins, which surpassed 4% and reached a new company record. Margins for both regions improved from the first quarter as the company continued to reduce the cost to serve its e-commerce customers. Amazon also got a benefit from the recently deployed DeepFleet, an AI model that manages the movement of its robotics in fulfillment centers. Jassy said DeepFleet is helping robots travel more efficiently, translating to faster delivery times and lower costs for customers. On the capital expenditure side, Amazon invested roughly $31.4 billion in the second quarter, which was about $5 billion more than expected and a step up from $24.3 billion in the first quarter. Management expects the second quarter capex figure to represent the quarterly capital investment rate for the second half of the year, implying full year capex to be about $117 billion. That's an increase of management's prior plan to invest $100 billion this year. The primary driver of these investments will go to AWS to support demand for AI services, but Amazon is also investing in its fulfillment and transportation network. With earnings from the cloud computing "hyperscalers" now complete, once again we saw all the major players spend more than anticipated and signal plans to invest more aggressively in the quarters ahead. Guidance Amazon's 2025 third-quarter guidance was better than anticipated on sales but missed on operating income. The company expects net sales to increase 10% to 13% year over year to $174 billion to $179.5 billion. This outlook is well above the consensus estimate of $173.27 billion. Online sales are expected to increase in the third quarter over the second, and one reason why is the successful four-day Prime Day shopping event held earlier in July. Jassy said it set records for sales, number of items sold, and the number of Prime signups in the weeks leading up to the longer event. However, third-quarter operating income is expected to land between $15.5 billion and $20.5 billion, which at a midpoint of $18 billion misses the Street consensus estimate of $19.5 billion. Guidance always matters, but so does historical context. The company has a history of underpromising and overdelivering. Here's a good example of what we mean by this: Three months ago, Amazon management said it expected second-quarter revenues to be between $159 billion and $164 billion, a range that proved to be too conservative since Amazon just reported $167.7 billion in sales. The same goes for operating income. Last quarter, the company guided to $13 billion and $17.5 billion, and Amazon just printed $19.17 billion. Amazon won't beat the high end of its outlook every quarter, but we take some comfort that the top end of its third-quarter outlook is above the consensus forecast. (Jim Cramer's Charitable Trust is long AMZN. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.