It was an outstanding Q2 for Amazon as earnings exploded to record levels. The e-commerce business delivered slightly less revenue than expected, but the story of this quarter was profitability and cloud growth.
Amazon disclosed its biggest quarterly profit in company history on Thursday, thanks to a surprisingly strong performance from (1) the core North American retail business and (2) the cloud computing business, Amazon Web Services (AWS).
First, on the e-commerce business.
Amazon delivered record e-commerce / retail profits driven by a number of factors.
(1) Growth in its higher-margin "third party" seller marketplace. This is the marketplace where Amazon lets sellers list their items for buyers to find and purchase (similar to eBay).
(2) Growth in online ad sales on Amazon.com, which are also high margin and indirectly tied to its e-commerce growth (more Amazon.com customers >> more eyeballs for advertisers).
(3) Reduced operating costs due to better efficiencies in warehouses and data centers, as well as a slowdown in hiring.
Second, on the cloud business.
The AWS business re-accelerated its sales growth for the third straight quarter, up +49% year-over-year, despite increased competition from Microsoft and Google. This business is highly profitable (27% operating margin in Q2, up from 25% last year) which contributed to the overall company's record earnings.
When you put it all together, it was an outstanding quarter of execution and profitability for a company that typically reports razor-thin profit margins (if not losses) by design.
Amazon typically reinvests most/all of its profits for future growth, so the record earnings in Q2 suggest past investments are already yielding tremendous returns. Its moat continues to widen across all business segments.
At nearly $900 billion market cap, we think Amazon stands a real chance at winning the race to $1 trillion.
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