Everything You Need to Know About Amazon's Q2 Earnings

Amazon shares declined more than 7% in extended trading after closing at $184.07. The stock had gained 21% this year. In recent weeks, investors have signaled growing impatience with tech companies’ efforts to profit from their massive investments in AI.

Amazon’s total revenue increased 10% to $148 billion, a touch below the $148.8 billion that analysts expected. Despite earnings per share (EPS) of $1.26, beating estimates of $1.04 and nearly doubling profits from the same period last year, investors focused instead on the report's weaknesses.

Amazon reported third quarter sales guidance that missed analyst estimates. Net sales are expected to be between $154.0 billion and $158.5 billion, compared to analyst forecasts of $158.43 billion. Operating income is expected to be between $11.5 billion and $15.0 billion, compared to analyst forecasts of $15.66 billion, signaling to investors that profits for now will take a back seat to heavy spending on artificial intelligence.

A bright spot of the report came from its cloud business, Amazon Web Services. AWS raked in $26.3 billion in revenue compared to the $26 billion expected and well above the $22.1 billion during the same time last year.

Amazon CFO Brian Olsavsky told reporters on a call after earnings that AWS is poised to generate more than $105 billion annually.

Like several of its peers, Amazon is investing heavily in infrastructure to support the rapid deployment of new AI technologies and cloud services.

Olsavsky said the company has spent just over $30 billion in the first half of the year on capital expenditures, owing to the growing need for AWS services, including demand for generative AI tools. Amazon expects those investments to increase for the second half of the year, he said.

“Amazon has always had spurts of investment at the expense of short-term margins, and it appears they are planning a spurt into the rest of the year,” said Gil Luria, an analyst at DA Davidson.

“The good news,” Luria said, is much of the money is going toward the Amazon Web Services cloud unit that produced 19% sales growth in the second quarter - more than analysts’ projected.

Amazon announced $12.77 billion in advertising revenue, marking a 20% year-over-year growth. However, this fell short of Wall Street’s expectations, which anticipated $13 billion for Q2 2024.

Amazon has sought to grow its advertising business, which largely comprises promotions on its ecommerce websites, and launched an ad-supported tier on its Prime Video streaming service this year.

JPMorgan analysts in June said advertising was “Amazon’s fastest-growing revenue stream and also one of its highest-margin businesses”.

On the ecommerce front, the everything store has drawn increasing competition from the likes of Temu and Shein, companies that specialize in low-cost goods that rely on a direct-from-factory supply chain. Amazon is reported to be developing a discount digital storefront of its own to directly compete for fashion and lifestyle spending.

“We are seeing cautious consumers," Olsavsky said. "They are looking for deals.” Big news events, including the Olympics, appear to have interrupted normal purchasing patterns in the current quarter, making it more difficult to forecast sales, he added.

Sky Canaves, an EMarketer Inc. analyst, cited “softer consumer spending” at the online business in the quarter, which fell between major sales in March and July.

“Amazon will have to position its offerings and promotions to take advantage of these trends, such as with the reported plans to launch a Temu-like discount section in time for the holidays this year,” she said.

Source: Bloomberg, Yahoo Finance, Financial Times