Amazon soars after CEO Andy Jassy makes the case for its massive AI investment

Amazon shares rallied after the company reported a much stronger-than-expected second quarter, with its high-margin cloud computing business delivering its fastest growth in 18 quarters. CEO Andy Jassy also delivered exactly what investors like us wanted to hear: a clear explanation of how its massive investment in artificial intelligence will generate returns. Revenue increased 20% year over year to $200 billion, beating the consensus analyst estimate of $196.47 billion, according to LSEG data. Earnings per share based on generally accepted accounting principles (GAAP) increased 242% year over year to $5.75. However, we cannot compare it to the $1.82 LSEG consensus estimate because the results included pre-tax gains of $53.4 billion in non-operating income primarily related to the company's investment in Anthropic. The inability to compare earnings is why we are placing greater emphasis on operating income, which knocked it out of the park, increasing 43% year over year to $27.46 billion, beating the $23.57 billion consensus forecast. Operating income benefited from roughly $1.2 billion in lower expenses, driven by $600 million in tariff-related refunds and a favorable change in the fair value of energy contracts. AMZN 1Y mountain Amazon 1-year stock performance Bottom line Amazon jumped about 10% to $258 in after-hours trading, putting shares at their highest level since early June. In May and June, the market began to worry about the seemingly unlimited AI infrastructure spending by the hyperscalers. The uncertainty over the returns companies like Amazon would earn on the hundreds of billions of dollars invested in artificial intelligence caused shares to drop from their high of about $275 in early May to $232 entering this week. That's what makes this earnings print — and the market's reaction — so interesting. Ignore the outlook for a moment because Amazon's massive size makes it difficult for the company to guide on a quarter-to-quarter basis. That's why management usually errs on the conservative side, and the market can see that tonight. Amazon's second-quarter revenue and operating income were above the high end of the range provided three months ago. What investors really wanted to know about was capital expenditures (capex), and they didn't flinch when management raised its forecast this year by $20 billion to $220 billion. The increase was largely driven by higher memory costs. Unlike Alphabet and Meta , whose shares fell after they raised capital spending guidance, Amazon's stock didn't skip a beat. Why we own it Amazon is widely known for online shopping, but its cloud business is the real breadwinner. Advertising is another fast-growing business with high margins. Investment in robust e-commerce logistics infrastructure makes its online storefront the place to be. Prime leverages free shipping and video streaming, along with tons of other perks, to keep users paying every month. Competitors : Walmart , Target , Microsoft , and Alphabet Most recent buy : April 15, 2025 Initiated : February 2018 Were investors bracing for a larger capex increase? Are they now more comfortable with Amazon's AI spending after Amazon Web Services delivered 37% year-over-year revenue growth on a high revenue base while maintaining strong margins? Or did CEO Andy Jassy's explanation of the economics behind Amazon's AI investments resonate? On the conference call, he laid out the company's line of sight to earning attractive returns on its data center investments and explained how cash flow should improve as new data centers come online and server capacity is utilized. "As we get a few years out and the revenue growth outpaces the incremental capex growth, which will happen at some point," Jassy said, "the resulting revenue, free cash flow and return on invested capital is very compelling." The answer may be a combination of all three. Not all hyperscalers are created equal. There are clearer paths to monetizing investment at Amazon than at Meta, and that's why Amazon is being rewarded. AWS is thriving, and it's hard to argue Amazon shouldn't be investing aggressively to meet demand given the business is delivering rapid revenue growth at highly attractive margins. We reiterate our 1 rating and $300 price target. Commentary Revenue growth at cloud unit Amazon Web Services (AWS) accelerated once again, this time to 36.8% from 28.4% last quarter, leading to revenue of $42.23 billion. This was much better than what analysts had expected. The consensus forecast was for revenue growth of about 31% and revenue of $40.54 billion. AI is clearly having a positive impact on AWS's growth. You don't grow at the fastest rate in 18 quarters without a significant tailwind. The run rate for AWS's AI business is now up to more than $25 billion, up a triple-digit percentage year over year. Operating income and operating margin also beat expectations. The fast sales growth led to strong operating leverage, with margins bumping up toward 40% from 33% one year ago. The company's portfolio of in-house chips, such as Graviton, Tranium, and Nitro, now exceeds a $25 billion run rate, up from $20 billion last quarter. On the call, Jassy said it's a "real chance" that Amazon will start selling its chip directly to customers, similar to Alphabet's relationship with Anthropic for its tensor processing units (TPUs). The AWS backlog closed the quarter at $496 billion, up from $364 billion last quarter. One reason for the quarter-over-quarter jump was the $100 billion collaboration it announced with Anthropic in April. With a backlog this large, expect Amazon to continue to aggressively invest. As for the rest of the company's business segments, there were solid revenue beats across Online Stores , Third-Party Seller Services , Advertising , and Other ( which includes healthcare, licensing, co-branded credit cards, and other businesses). We like to see the beats in Advertising because it's a high-margin revenue stream. Subscription Services is another high-margin business , but it missed by $88 million . Physical Stores also was a miss. Amazon's strength was broad-based. North America sales increased 16% to $116 billion, beating the consensus estimate by about $2.2 billion. Operating margins expanded 34 basis points over last year. In the International segment, revenue increased 15% year over year, but that missed by about $500 million. However, operating margins expanded by 1 basis point, leading to higher operating income than anticipated. On the Capital Expenditures side, Amazon spent approximately $53.1 billion in the quarter, up from about $44 billion in the first quarter and above the consensus estimate of $49 billion. Guidance Amazon provided guidance for the third quarter that was slightly below the street. As mentioned above, these figures are usually conservative. Both revenue and operating income in the reported quarter were above the high end of the range provided three months ago. The company expects net sales to increase 9% to 12% year over year, to $197 billion to $202 billion. That midpoint of $199.5 billion is below the consensus estimate of $203.9 billion, according to FactSet. Second-quarter operating income is expected to be between $22.5 billion and $26.5 billion. This midpoint of $24.5 billion was slightly below the consensus estimate of $24.98 billion. (Jim Cramer's Charitable Trust is long AMZN. See here for a full list of the stocks.) 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