Amazon (AMZN) recently reported its Q2 earnings, which showed a significant EPS beat but also revealed some challenges that are putting pressure on the stock. Despite a 91% surge in operating income to $14.67 billion, which exceeded prior guidance, revenue fell short of expectations. The midpoint of Q3 revenue guidance was also below analyst estimates. Additionally, Amazon’s comments about increased spending in the second half of the year have weighed on shares, leading to lackluster Q3 operating income guidance of $11.5-15.0 billion.
One of the key segments that Amazon highlighted in its earnings report was its Stores segment. The company saw 9% growth in North America and 10% in the international segment. Amazon noted that customers are trading down on price, impacting average selling prices (ASPs). Higher-ticket items like computers and electronics are growing slower than expected. However, faster delivery speeds are helping Amazon gain a larger share of everyday essentials. Despite lower-than-expected seller fees, North America unit growth is outpacing sales growth. Amazon’s focus on selection, low prices, and delivery is resonating with consumers, even though it may lead to short-term revenue compression.
Another standout segment for Amazon in Q2 was Amazon Web Services (AWS). AWS posted 19% growth in constant currency (CC), which was an improvement from previous quarters. This growth was surprising given Azure’s lackluster results earlier in the week. The drivers of AWS growth include companies completing cost optimization efforts and focusing on new initiatives. Businesses are modernizing their infrastructure by moving from on-premises to cloud solutions. There is also increasing excitement about leveraging AI, with Amazon’s AI business experiencing dramatic growth.
In terms of advertising services, Amazon saw segment revenue grow 20% CC to $12.77 billion, which was lower than recent quarters. Despite this, Amazon is pleased with the growth given its larger revenue base and continues to see opportunities in sponsored products and Prime video ads.
However, despite the positive aspects of Amazon’s Q2 earnings, investors are disappointed with the Q3 operating income guidance of $11.5-15.0 billion, especially after the strong performance in Q2. Like Microsoft, Amazon expects higher capital investments in the second half of the year, primarily to expand AWS infrastructure. Q3 margins will also be impacted by Prime Day, increased capacity for Q4 holiday volumes, and higher digital content costs from NFL Thursday Night Football.
In conclusion, Amazon’s Q2 earnings report showed a mix of positive and negative results. While the company saw significant growth in operating income and certain segments like AWS, challenges remain in terms of revenue and future spending. Investors will be closely watching how Amazon navigates these challenges in the coming quarters.