Sticking With This Amazon Price Target After ‘Compelling’ AI Capex Return

Hyperscaling tech giant Amazon (AMZN) released the firm’s second quarter financial results on Thursday evening.

For the period ended June 30, Amazon posted a GAAP EPS of $5.75 on revenue of $200.606 billion. While that top-line print was good for year-over-year growth of 19.6%, it also beat Wall Street’s expectations by more than $4 billion. The EPS print beat Wall Street by more than $1.80 per share. No, that’s not a misprint.

Now, there is something in the numbers that has nothing to do with corporate performance. Amazon posted non-operating pre-tax income of $53.4 billion, primarily due to the firm’s investment in Anthropic. That’s not a bad thing at all. What it does is force us to focus more on operating income than we might have otherwise in order to determine just how strong the quarter was. Psst… the quarter was still strong.

Investors don’t have to go far to see that Amazon Web Services (AWS) drove nearly 37% sales growth, its fastest pace in 18 quarters or four-and-a-half years. Interestingly, Amazon’s chief competitor in the cloud computing services business, Microsoft’s (MSFT) Azure also had a tremendous quarter.

The CEO

CEO Andy Jassy commented in the press release:

“AWS is booming, growing 36.7% year-over-year in Q2 — our fastest growth in 18 quarters — and our AI and Chips businesses each eclipsed run rates of more than $25 billion. In Stores, we again set record delivery speeds for Prime members in the first half of the year — over 40% more items delivered same-day or overnight, with Grocery and Everyday Essentials growing meaningfully faster than the rest of the business. And, Advertising had another strong quarter with 26% year-over-year growth.”

That comment seems perfunctory to me. It was during the call, when explaining the economics behind the AI capex upspend, that perhaps Jassy made the most sense.

Investors were listening when Jassy said, “As we get a few years out and the revenue growth outpaces the incremental capex growth, which will happen at some point … the resulting revenue, free cash flow and return on invested capital is very compelling.”

Operations

As Amazon drove net revenue of $200.606 billion (+19.6%), the cost of sales increased 18.5% to $95.778 billion. Total operating expenses (including costs of sales) increased 16.6% to $173.145 billion. This left a GAAP operating income of $27.461 billion, which was up 43.2% from the year-ago period. This number for operating income also beat Wall Street’s expectations by nearly $4 billion. Yes, Amazon had a great quarter.

Once accounting for interest, other income and expenses (including $53.396 billion related to the Anthropic investment) and taxes, GAAP net income printed at $62.647 billion (+244.9%). This works out to a fully diluted GAAP $5.75 per share, up from $1.68 for the year-ago comparison.

Segment Sales Performance

Online Stores generated revenue of $70.432 billion (+14.6%)

Third-Party Sellers generated revenue of $46.78 billion (+15.9%)

Amazon Web Services generated revenue of $42.232 billion (+36.8%)

Advertising Services generated revenue of $19.809 billion (+26.2%)

Subscription Services generated revenue of $13.73 billion (+12.5%)

Physical Stores generated revenue of $5.794 billion (+3.6%)

Other generated revenue of $1.829 billion (+22%)

Regional Performance

North America generated revenue of $116.177 billion (+16%), producing operating income of $9.123 billion (+21%) on an operating margin of 7.85% (up from 7.51%).

International generated revenue of $42.917 billion (+15%), producing operating income of $1.717 billion (+15%) on an operating margin of 4.07% (up from 4.06%)

Amazon Web Services generated revenue of $42.232 billion (+36.8%), producing operating income of $16.621 billion (+64%) on an operating margin of 39.36% (up sharply from 32.91%).

Guidance

For the current quarter, Amazon is projecting total revenue of $197 billion to $203 billion. That would be good for year-over-year growth of between 9% and 12%. Wall Street was looking for something closer to $204 billion. Operating income is projected at $22.5 billion to $26.5 billion. That took the midpoint below the $25 billion that Wall Street had in mind. Then again, Amazon is often conservative in issuing its outlook. Investors appear to be assuming more of the same in this case.

Fundamentals

For the past 12 months, Amazon generated operating cash flow of $161.403 billion (+33%). Out of that number came capex spending of $169.007 billion (+645), leaving “free” cash flow of -$7.604 billion. For the quarter, Amazon generated operating cash flow of $45.387 billion and “free” cash flow of -$8.821 billion. Hence, Jassy’s comments mentioned above.

Even with the cash burn, Amazon ended the period with a cash position of $122.988 billion and inventories of $38.184 billion. That puts current assets at $249.264 billion. The Anthropic investment is labeled as an “other asset” and is not considered to be current, so that almost $123 billion is very liquid. Current liabilities add up to $241.274 billion, including unearned revenue of $20.428 billion.

This leaves the firm with current and quick ratios of 1.03 and 0.87, respectively. These ratios do pass muster, just barely. Adjusted for those unearned revenues, these ratios rise to 1.13 and 0.96. Now, remember there is an entry for $284.132 billion for “other” assets on the balance sheet that we are not using in these ratios. Amazon is healthy.

Total assets amount to $1.096 trillion, of which only $23.504 billion is labeled as either goodwill or intangible. Total liabilities less equity comes to $544.069 billion. This does include $128.894 billion worth of long-term debt. The firm has no short-term debt on the books. I am fine with this “huge” balance sheet. There is a lot here. It all makes sense to me.

Opinion

I have never been crazy about Jassy. I like him more today than I had coming in. I like the way that he explained the increased capex spending and congruent cash burn. The balance sheet sure can handle the investment. Speaking of investments, even without Anthropic, Amazon had a fantastic quarter.

The set-up that I gave you on Monday, highlighting Microsoft and Amazon as the “Mag 7” names to be long going into earnings appears to have worked to perfection. Hey, I take my lumps when we fail. We aced this mega-cap earnings season, dudes.

Our cup-with-handle pattern of bullish reversal that came out of a double-top pattern was a beauty. This stock continues to play the technical game in a way that foretells its moves well ahead of time and we are grateful. The stock just took back its 200-day SMA, 21-day EMA and 50-day SMA. This forces portfolio managers to increase long-side exposure while getting the swing crowd on the same side of the football.

Looking at most our most relied upon indicators. Relative strength has spiked but is not yet in a technically overbought state. The daily MACD has just strengthened as well. The histogram of the nine-day EMA has gone positive. In addition, the 12-day EMA has crossed above the 26-day EMA. Both of those lines are still below the zero-bound, but they are close to gaining that line. Maintaining that posture while moving above zero would reinforce the bullish signal.

Target Price: $316 (reiteration)

Pivot: $258 (apex of the right side of the cup)

Add: Down to the 200-day SMA

Panic: Loss of the late June low