Amazon Stock Soared on Q2 Earnings Beat and Analysts See More Upside

Amazon stock (NYSE: AMZN) soared over 8% yesterday after markets gave a thumbs up to its Q2 2023 earnings and Q3 guidance. Here are the key takeaways from the report and Wall Street’s reaction.

Amazon reported revenues of $134.4 billion in the quarter which was 11% higher YoY and ahead of the $131.5 billion that analysts expected. Looking at the business segments, the North America segment posted revenues of $82.5 billion – 11% higher than the corresponding quarter last year.

Amazon reported better-than-expected revenues

The International segment’s revenues increased 10% YoY to $29.7 billion while AWS revenues rose 12% over the period to $22.1 billion. Analysts were especially watching the trajectory of AWS revenues as the business – which is nothing short of a cash cow for Amazon – but has been witnessing a gradual fall in revenue growth.

While the downward trend in AWS revenue growth continued in Q2 2023 also the business has nonetheless shown signs of stabilization and the revenue came in ahead of the $21.8 billion that analysts expected.

Amazon’s advertising revenues also rose 22% YoY to $10.7 billion while analysts were expecting the metric at $10.4 billion.

In his prepared remarks, Amazon’s CEO Andy Jassy said, “We continued lowering our cost to serve in our fulfillment network, while also providing Prime customers with the fastest delivery speeds we’ve ever recorded.”

He added, “Our AWS growth stabilized as customers started shifting from cost optimization to new workload deployment, and AWS has continued to add to its meaningful leadership position in the cloud with a slew of generative AI releases.”

AMZN’s operating profits more than doubled in the quarter

Amazon posted an operating profit of $7.7 billion in the quarter which was over twice the $3.3 billion that it posted in the corresponding quarter last year and well ahead of its guidance.

The company’s North America segment posted an operating profit of $3.2 billion as compared to an operating loss of $0.6 billion in the corresponding quarter last year. Its International segment however posted an operating loss of $0.9 billion but even its losses were down in half as compared to Q2 2022.

The AWS segment posted an operating income of $5.4 billion as compared to $5.7 billion in the corresponding quarter last year.

The company posted an EPS of 65 cents in the quarter which was almost twice the 35 cents that analysts expected.

This is the biggest earnings beat for Amazon since Q4 2020 and markets sent the stock north even as the broader markets were weak on Friday.

Amazon provided strong guidance

Amazon’s Q3 guidance was also strong and the company forecast revenues between $138 billion to $143 billion which implies a YoY growth between 9%-13%. The guidance was ahead of the $138.25 billion that analysts expected.

It forecast an operating income between $5.5 billion-$8.5 billion in the third quarter as compared to $2.5 billion in the third quarter of 2022.

Amazon’s CFO Brian Olsavsky said, “During the quarter, we also saw improvements in macroeconomic indicators across our North America and international segments but continue to see customers trading down and seeking value in their purchases.”

He added, “We continue to see healthy demand across everyday essentials and in categories like beauty and health and personal care.”

While Amazon did not provide guidance for AWS business, Olsavsky said that “the business has stabilized” and the trend that it saw in the second quarter continues in July.

Amazon Business is at a revenue run rate of $35 billion.

The company also talked about the Amazon Business which is its B2B business and said that its gross sales run rate is now $35 billion. It also added that Amazon Pharmacy’s active customers have doubled its active users over the last year.

The company was also quite upbeat about its AI business and said, “Inside Amazon, every one of our teams is working on building generative AI applications that reinvent and enhance their customers’ experience.”

How did Wall Street analysts react to AMZN’s earnings?

Goldman Sachs analyst Eric Sheridan raised Amazon’s target price from $165 to $180 and said, “After trading in a range (& underperforming the broader market) for most of the past 2-3 years, we see AMZN as well positioned for future outperformance as eCommerce margins continue a trajectory of scaling over headwinds created in recent years, as its advertising business continues to achieve scale and as AWS can still benefit from a long-tailed structural growth opportunity in the shifting needs of enterprise customers (while producing a balance of growth and margins).”

JPMorgan’s Doug Anmuth also raised his target price to $180 and said: “Our bull thesis on AMZN has been AWS stabilizing while Retail sees accelerating growth and meaningful margin expansion which, combined with a decline in overall AMZN capex, should drive meaningful FCF inflection in 2023.”

He added, “We believe 2Q results and the 3Q guide suggest that thesis is playing out and AMZN estimates should move meaningfully higher.”

Among other analysts, Bank of America’s Justin Post, raised his price target from $154 to $174 while Citi’s Ronald Josey raised his from $145 to $167.

Morgan Stanley raised AMZN’s target price to $175

Morgan Stanley raised Amazon’s target price from $150 to $175 and said “after multiple quarters of optimizations, AWS has stabilized and is now seeing more customers shift their focus toward driving innovation, bringing new workloads to the cloud.”

Analyst Brian Nowak added, “We think this stability/incremental work load trend has continued into 3Q … which given the easing Y/Y 2H compares (due to higher optimizations) should lead to a rather steep re-acceleration.”

After the spike yesterday, Amazon stock is now up over 62% for the year and is the second-best-performing FAANG stock of the year. Wall Street analysts meanwhile see more upside in the stock and most raised their target prices following the impressive Q2 earnings.