Amazon

Amazon reported second-quarter results that beat the high end of guidance on both the top and bottom lines. Revenue increased 20% year over year in constant currency to $200.6 billion, while operating margin was 13.7% versus 11.4% a year ago.

Why it matters: Overall results are good, as consumer spending remains stable, Prime Day was a success, the expansion of grocery and same-day delivery continues to drive demand, and artificial intelligence supports surging AWS growth. Further, profitability is impressive against various margin headwinds. All segments were ahead of our model, with physical stores slightly light, just like last quarter. Online stores, third-party seller services, and AWS were each more than $1 billion above expectations. We do not see any areas of concern with demand and believe the results support our positive long-term view on Amazon. Operating income was $27.5 billion with a margin of 13.7%, compared with the high end of guidance at $24.0 billion. Ramping up Leo costs, tariffs, massive data center expansion, and conflicts in Ukraine and the Middle East could have hampered results, but did not have a meaningful impact.

The bottom line: We raise our fair value estimate for wide-moat Amazon to $300 from $280 previously. Good results were matched by solid guidance, which drove increases in our estimates, particularly for AWS and advertising. Even with a pop in after-hours trading, we still see shares as attractive. AWS was strong, with growth accelerating sharply to 37% year over year, the fastest growth printed in 18 quarters, which is astounding given the unit’s scale. The surging demand spans both traditional and AI workloads and clearly supports management’s massive capital investment plans.

Coming up: The outlook for third-quarter revenue and profitability bracketed our estimates. The midpoint of guidance calls for revenue of $199.5 billion and operating profit of $24.5 billion.

AWS continues to benefit from surging demand for both traditional and AI workloads, which is consistent with our thesis that centers around AWS driving overall long-term growth for the company. We note a $25 billion annual run-rate business in generative AI that continues to grow at more than 100% year over year. Management also confirmed that AWS remains capacity-constrained for gen AI usage, which is consistent with peers. Capacity is near fully subscribed through 2027. The AWS backlog was $496 billion, up more than 100% year over year, and represents a good indicator of growth in the coming quarters. Management indicated that the capital expenditure target of $200 billion is more likely to be $220 billion for the year, due to higher component pricing. This certainly bears monitoring, but for now, we take comfort in the fact that all three hyperscalers are operating at full capacity.

Management also indicated that Amazon’s chip business is producing an annual run rate of more than $25 billion and growing at more than 100%, which is impressive and underscores the company’s full AI and cloud stack. Management indicated it is in talks to sell chips directly to third parties, and this is likely to happen in the not-so-distant future. Finally, the company indicated it is pursuing its own frontier model in the name of cost efficiency and customer choice, and believes it will be one of half a dozen leading models.

Second-quarter AWS revenue accelerated sharply to 37% year over year, to $42.2 billion, up from 28% last quarter and 17% a year ago. Acceleration and growth at this pace for a business the size of AWS is astonishing. We note Google Cloud and Azure are growing faster, but given AWS' relative size compared with its competitors, we expect it to grow more slowly, so this is not a concern. We firmly believe there is room for multiple winners in public cloud and gen AI, and we expect AWS to retain its leading position for years to come, given the compelling portfolio it offers.

AWS' operating margin was 39.4%, up from 32.9% a year ago and 37.7% last quarter, driven by ramping efficiencies in launching and scaling new data center capacity. That said, segment margin by about 140 basis points based on an accounting change related to the fair value of derivative contracts. We think the long-term margin trend for AWS is up, even if not always in a linear fashion. Strong margins should help assuage the bear case regarding returns.

On the retail side, Amazon continues to target the overall customer experience by expanding its selection, offering lower prices, and improving delivery speed. We believe this strategy will continue to serve the company well as both a near-term tactic and a long-term strategy. These factors continue to drive order frequency and ticket sizes for Prime members. Amazon continues to make progress along each vector. We see continued expansion of same-day delivery as a growth driver, while the regional hub model improves delivery speeds and lowers costs. The expansion of the grocery category for same-day delivery to 2,300 cities, now with more planned, continues to support our growth assumptions. Management noted that the inclusion of perishables is also driving higher purchasing of everyday essentials. Additionally, Amazon Haul's recent expansion into ultra-low-price items is contributing to growth and driving more frequent purchases.

Paid unit growth was 17% year over year, which continues to support the consumer trade-down narrative. As the rollout expands and more grocery items are included, this is not altogether surprising and is consistent with trends over the last 10 quarters. From a retail sales perspective, revenue from online stores increased 15%, with a 400-basis-point benefit from the Prime Day shift; physical stores increased 5%; third-party increased 16%; and subscription services increased 12% (all year over year, as reported).

We think advertising performed well, with 26% year-over-year growth to $19.8 billion. The power of these ads, inserted directly into the purchasing decision process, is obvious. Beyond that, we think Amazon's demand-side platform offers a rich opportunity for advertisers to reach narrowly targeted audiences through the company's proprietary first-party data, its roster of compelling streaming and internet properties, and its integrations with publishers and other supply-side platforms. We view advertising as a key pillar of our long-term thesis for both growth and profitability.

Margins have been consistently stronger than anticipated over the past couple of years, and we think there is room for expansion as the multihub strategy and increased use of robotics continue to unlock efficiencies, although launch costs from Amazon Leo and ever-increasing capital expenditures and the associated depreciation could serve as a margin governor over the next several years. We think recent headcount reductions will help support margins in the near term. Second-quarter profitability was impressive, with reported operating profit at $27.5 billion, compared with the high end of guidance at $24.0 billion. This resulted in an operating margin of 13.7%, compared with 11.4% a year ago. In total, the company had $1.2 billion in unusual benefits that boosted margin by approximately 60 basis points—the aforementioned AWS change and tariff refunds of about $600 million.

Our fair value estimate for Amazon is $300 per share, which implies a 2026 enterprise value/sales multiple of 4 times and a negative 1% free cash flow yield. We note that the free cash flow yield is constrained by the significant AWS capacity expansion underway.

Over the long term, we expect e-commerce to continue to take share from brick-and-mortar retailers. We further expect Amazon to gain share online. We believe that over the medium term, covid pulled forward some demand by changing consumer behavior and better penetrating some retail categories, such as groceries, pharmacy, and luxury goods, that previously had not gained as much traction online. We think Prime subscriptions and the accompanying benefits, combined with selection, price, and convenience, continue to drive the retail story. We also see international as a longer-term opportunity within retail. We model total retail-related revenue growing at an 8% compound annual growth rate over the next five years.

We believe the critical growth drivers over the medium term will be AWS and advertising. Since these segments earn materially higher margins than the rest of the business, we also expect them to drive margins higher over time. Over the next five years, we project AWS revenue growing at a 23% CAGR and advertising revenue growing at a 19% CAGR. In total, Amazon should grow at an 13% CAGR through 2030. We model GAAP operating margin expanding from 11% (actual) in 2025 to approximately 14% in 2030 as the company grows into its expanded footprint and optimizes its substantial investment in delivery.

We assign a wide moat rating to Amazon based on network effects, cost advantages, intangible assets, and switching costs. Amazon has been disrupting the traditional retail industry for more than 25 years, while also emerging as the leading public cloud service provider via Amazon Web Services, or AWS. This disruption has been embraced by consumers and has driven change across the entire industry as traditional retailers have invested heavily in technology in order to keep pace. Recent episodes of covid lockdowns and generative AI have accelerated change, and given its technological prowess, massive scale, and relationship with consumers, we think Amazon has widened its lead, which we believe will result in economic returns well in excess of its cost of capital for years to come.

We believe Amazon’s retail business has a wide moat stemming from network effects associated with its marketplace where more buyers and sellers continually attract more buyers and sellers; a cost advantage tied to purchasing power, logistics, vertical integration (proprietary brands, owned delivery, and so on), and a negative cash conversion cycle; and intangible assets associated with technology and branding. We also believe AWS is a wide-moat business, thanks to high customer switching costs; a cost advantage associated with economies of scale where few competitors can keep up with Amazon’s investment pace; intangible assets arising from semiconductor and facility development; and a network effect associated with a marketplace for software created to make AWS work better for them. We also would assign Amazon’s advertising business a wide moat based on intangible assets from its proprietary data on hundreds of millions of users and a network effect again focusing on buyers and sellers meeting in the largest available venues. Finally, we believe that the wide moat for Amazon’s entire business is greater than the sum of its parts, and we prefer to analyze Amazon’s moat on the whole, as Amazon’s segments reinforce one another and returns result in an unrivaled consumer experience.

Together, we believe Amazon’s retail business enjoys a wide moat supported by cost advantages, intangible assets, and network effects. We assess the moat around Amazon’s retail business based on a combination of online stores, third-party seller services, subscription services, and physical stores, as we find it challenging to think about sustainable competitive advantages for each of these segments in isolation. Most obviously, given its massive scale, Amazon has created cost advantages including buying power, economies of scope, route density, and research and development. From a total gross merchandise value, or GMV, perspective, with more than $800 billion in 2024, Amazon is the largest retailer in the world. Additionally, the company has become more vertically integrated over time, and has built out its own transportation network. Size dictates certain scales of efficiency, but we think Amazon has become the definition of operational excellence.

Again, these advantages are related and reinforce one another in a virtuous circle. Low prices and an unmatched selection have come to define the company in consumer’s minds, giving rise to intangible assets from branding and technology (search capabilities and recommendation engine). Product searches are more likely to begin on Amazon than they are Google. Amazon, in fact, has become the only demand aggregator at scale within the US because of its wide selection, intelligent recommendation algorithms, low prices, and convenience, which combine into a powerful business model. Walmart has grown to be a meaningful online competitor but remains considerably smaller.

We also believe Amazon’s retail business benefits from network effects. The sheer number of consumers shopping on Amazon makes it attractive to third party sellers, while the marketplace expands the selection available to shoppers and makes Amazon a more attractive online destination for consumers. In fact, approximately 60% of total goods sold by Amazon are through the firm’s third-party marketplace. At the heart of third-party seller services is the commission Amazon collects from the independent seller. However, these services also include fulfillment by Amazon, or FBA, distribution facility storage, shipping, payment processing, and other related items.

To further improve the consumer experience and more tightly tie users to Amazon, the company has moved increasingly into content. Consumers can now have Prime Video, Music Unlimited, Kindle Unlimited, Prime Gaming, and other similar subscription services. The company even produces original content for Prime Video to help reinforce the notion that consumers can get anything they need from Amazon. We view the Kindle, Echo, Fire, and other Amazon original devices as interesting on their own merits, but think the underlying point is to once again draw in more consumers to Amazon’s retail properties and engage those customers that are already within the ecosystem. Amazon’s hardware helps to enable Amazon’s services. The Kindle, for example, dovetails perfectly with Kindle Unlimited, which for a nominal monthly subscription, allows users to read from a selection of more than one million book titles. The company even offers a direct to Kindle book publishing service.

The common thread that weaves throughout Amazon’s retail business is Amazon Prime, which for $139 per year (in 2025) allows users to have unlimited free shipping on millions of stock-keeping units, or SKUs, including same-day or one-day shipping on many items, access to Prime Video, Prime Music, and a variety of other benefits. We view Prime subscriptions and the differentiated user experience they offer as critical to attracting and retaining customers. Prime memberships generate high cash flow that can be reinvested in further improving the user experience on the technology, content, and delivery fronts. Prime customers are very sticky and tend to purchase from Amazon more frequently, across more retail categories, and have larger tickets. We think content combined with Prime subscriptions actually build a switching cost that consumers would need to overcome, although these switching costs might not last for decades in order to warrant it as a moat source.

Advertising is related to Amazon’s retail operations in that it mostly takes place on Amazon’s own online properties. Advertising is growing rapidly and is likely the segment with the highest operating margins in Amazon’s portfolio, likely in excess of 30%. We believe advertising dollars flow to where the eyeballs are and where information is known about the online user, which fits in very well with Amazon’s strengths. We therefore expect advertising to grow rapidly over the next several years and continue to boost the company’s overall profitability.

Looking at advertising in isolation, we would likely assign it with a wide moat rating based on intangible assets arising from proprietary technology (data), and network effects. We think Amazon’s advertising business is especially attractive to advertisers because there is proprietary information about the consumers and real-time data about when they are searching for a particular product, and Amazon already enjoys substantial traffic. We expect this business to continue to grow rapidly and offer an attractive alternative to platforms from social media companies and internet search providers.

Amazon Web Services, or AWS, enjoys a wide moat, supported by switching costs, network effects, intangible assets, and cost advantages. Amazon was a pioneer in public cloud services and retains a substantial lead over its closes rival, Microsoft. AWS has driven profitability for the entire company—although it represents 15% to 20% of revenue, it generates the majority of total operating profit dollars for Amazon. We also expect AWS to remain a key growth driver for the company over the next decade.

AWS differs from the company’s e-commerce operations in that it is enterprise-facing rather than consumer facing, and embedded within the cloud services umbrella is a comprehensive menu of hardware and software usage. Enterprise customers rely on AWS for core IT infrastructure and managed services, which represents significant switching costs in terms of the time and expense of integrating applications with core software elements, such as the database, and dedicates a user to a specific set of software development tools. Additionally, data egress fees support the presence of an economic moat. Ultimately, the operational risks to changing mission critical technology infrastructure is high, which is why core elements such as ERP systems and cloud providers are rarely changed.

Further, we believe it is cheaper initially for companies to move workloads to the cloud, as there are less upfront costs and a lower bar to clear for maintenance and administration. Additionally, Amazon has devoted significant R&D resources to adding advanced features to the platform. Along those lines, Amazon Web Services offers scale advantages to clients in that it is cheaper and faster to set up IT infrastructure in the cloud compared with undertaking the same effort independently. Customers also benefit from the ability to scale up compute power for burst requirements, paying for only what they need and having it available effectively on-demand. We have seen some of the largest technology companies in the world fail to keep pace with Amazon’s massive investments in cloud infrastructure over the years, and AWS’ cost and scale advantages over its rivals is obvious.

Amazon has amassed significant technology and process knowledge, which we believe is an intangible asset for the firm as a whole and also for AWS. These assets could also apply to the logistics aspect of the retail business. The company expanded its distribution network by roughly 50% in 2020 while managing through a global pandemic and has been optimizing and automating since. Given the size of its footprint, this is a monumental achievement and speaks to the company’s ability to quickly plan, construct, and expand facilities based on specific needs. The knowledge base to quickly and efficiently bring massive data centers online for AWS is similarly impressive and only comes from the experience of previously building hyper scale data centers. Additionally, the firm designs its own semiconductors that are used for both internal consumption and client workloads, and has also developed proprietary robotic automation technology used in its fulfilment centers.

Lastly, like other large software companies, we see a network effect within AWS’ ecosystem for third-party software, although we view this as more of secondary moat source. The large ecosystem of AWS users has benefited from the software development efforts of those same users, as they turnaround and offer applications written within the AWS platform for AWS users. Thus, a large user base helps attract other users to AWS. We see Microsoft and Salesforce in particular as the best comparable examples within software of creating network effects.

Taken together, we think network effects, intangible assets, cost advantages, and switching combine to form a powerful moat Amazon overall. We think many of these areas reinforce one another and see little difficulty in Amazon continuing to deliver returns on invested capital well in excess of its cost of capital over the long term.

Amazon is the clear leader in e-commerce and enjoys unrivaled scale to continue to invest in growth opportunities and drive the very best customer experience.

High-margin advertising and AWS are growing faster than the corporate average, which should continue to boost profitability over the next several years.

Amazon Prime memberships help attract and retain customers who spend more with Amazon; this reinforces a powerful network effect while bringing in recurring and high-margin revenue.

Regulatory concerns are rising for large technology firms, including Amazon. The firm may face increasing regulatory and compliance issues as it expands internationally.

New investments, notably in fulfillment, delivery, and AWS should dampen free cash flow growth. AWS investments for AI have been substantial and are likely to remain elevated for several years.

Amazon may not be as successful in penetrating new retail categories, such as luxury goods, due to consumer preferences and an improved e-commerce experience from larger retailers. The same applies to international expansion.