Amazon (AMZN -10%) is experiencing pressure despite a significant EPS beat for Q2. Operating income for Q2 surged 91% year-over-year to $14.67 billion, exceeding the prior guidance of $10-14 billion. However, revenue fell short, and the midpoint of Q3 revenue guidance was below analyst expectations. Additionally, Amazon's comments about increased spending in the second half of the year are weighing on shares, reflected in the lackluster Q3 operating income guidance of $11.5-15.0 billion.
- Stores Segment: Amazon saw 9% growth in North America and 10% in the international segment. The company 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.
- Faster delivery speeds are helping Amazon gain a larger share of everyday essentials. Although seller fees were lower than expected, North America unit growth is outpacing sales growth. Amazon's focus on selection, low prices, and delivery is resonating with consumers, despite short-term revenue compression.
- Amazon Web Services (AWS): AWS was the standout segment in Q2, posting 19% growth in constant currency (CC), an improvement from previous quarters. The growth was surprising given Azure's lackluster results earlier in the week.
- Drivers of AWS Growth:
- Companies have completed most of their cost optimization efforts and are focusing on new initiatives.
- Businesses are modernizing their infrastructure, moving from on-premises to cloud solutions.
- There is increasing excitement about leveraging AI, with Amazon's AI business growing dramatically.
- Advertising Services: Segment revenue grew 20% CC to $12.77 billion, 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.
In addition to the slight Q2 top-line miss, investors are disappointed with Amazon's Q3 operating income guidance of $11.5-15.0 billion, especially after posting $14.67 billion in Q2. Similar to Microsoft (MSFT, Financial), Amazon expects higher capital investments in the second half of 2024, 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.
