Amazon rallies as enthralled analysts tout Q2 earnings
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Amazon.com (NASDAQ:AMZN) rallied 11% on Friday after reporting results and forecasts that outstripped expectations.
The company forecast net sales for the third quarter between $138B and $143B, up 9% and 13%, respectively, compared with the third quarter of 2022. For the second quarter, net sales increased 11% to $134.4B, compared with $121.2B in the second quarter of 2022.
The cloud business was better-than-expected as AWS revenue came in at $22.14B vs. $21.74B consensus.
Analysts were generally overjoyed with the results, bumping estimates and price targets higher. They cited higher margins, cost cutting and operational efficiencies, as well as the stabilization of AWS. Groceries are still a work in progress, and optimism abounds.
Needham: Buy
Needham analysts Laura Martin and Dan Medina raised estimates and their price target to $160 from $150 after AMZN reported earnings.
Needham applauded a bundle of Amazon achievements, including: the focus on profits and margins, high margins in advertising and cost cutting.
Namely, AMZN transitioned from one national network in the U.S. to eight regions serving smaller geographic areas, which delivered a 20% reduction in touches per delivered package, a 19% reduction in miles traveled to deliver a package to each customer and 76% of deliveries packed and delivered inside a single region.
Additionally, Needham noted that generative AI investments are âvisible.â
âEvery business within Amazon has multiple generative AI initiatives, from improving the cost structure to creating new products that enhance the customer experience,â Needham said.
Finally, AMZN is reexamining its grocery strategy, which hasn't been working. The company is doing a beta test with a couple of Amazon Fresh stores, but doesn't have conviction around anything it wants to roll out.
Morgan Stanley: Overweight
The firm bumped its price target for AMZN to $175 from $150.
AWS has stabilized and is now seeing more customers shift their focus toward driving innovation and bringing new workloads to the cloud, Morgan Stanley analysts led by Brian Nowak wrote in a note.
âWe now model AWS to grow ~15.5%/20% in 3Q23/4Q23 vs ~7%/10% previously,â the analysts said. The firm sees structurally faster AWS growth in 2024 and beyond.
Morgan Stanley also noted that AMZN's retail share gains seem to be accelerating and the company is driving improved unit economics across fulfillment and shipping. The retailer also sees the potential for further logistics efficiencies.
Amazonâs (AMZN) focus on faster speeds is key as one-day/same day delivery has historically led to higher conversion and consumer spend growth, âwhich, when combined with better unit economics, may mean AMZN is entering a period of faster sustained N. America retail growth and improving profitability.â
BofA: Buy
U.S. retail margins improved with network regionalization driving efficiency and thereâs more to come, BofA analysts Justin Post and Michael McGovern wrote in a note.
The analysts upped retail and AWS revenue forecasts, as well as raising gross margin estimates for shipping cost leverage, again citing the companyâs regionalization efforts.
âWe expect several more quarters of margin benefits from increasing retail efficiency,â BofA said. In addition, AWS seems âpoised to accelerate.â
The firm raised its price objective to $174 from $154.
Rosenblatt: Buy
Analyst Barton Crockett upgraded shares to Buy from Neutral and increased the price target to $184 from $73.
âOur past concerns â that consensus views were too optimistic â have abated,â Crockett wrote in a note. âAs the business resets, with efficiency a new focus for retail, and AI an emerging driver in cloud, the risk of impending economic headwinds looks less worrying, opening the door to higher multiple consumer growth stories.â
For AWS, Amazon (AMZN) said the negative pressure from "optimizations" by customers seeking to save money was offset by growth in workloads and customers.
And while generative AI is not yet material, the retailerâs scale and history of selling machine learning services, and its investments in core capabilities including custom inferential and training chips, âargue that it can participate in a rising tide lifts all meaningful boats capacity, if generative AI sparks a new growth phase in the cloud sector.â
William Blair: Outperform
North America segment margin improvement is driving much of the earnings upside, William Blair said in a note.
âAs per concerns that investments in the notoriously low-margin, capital-intensive grocery segment could set profitability back, here management indicated it would only more fully engage the rollout of physical grocery capacity at a more compelling return on capital than it is currently seeing,â William Blair analysts led by Dylan Carden wrote.
âManagement also notes potentially more margin opportunity through further enhancements in its fulfillment localization strategy, which cuts down on inventory touch points and travel distances.â
Earnings guidance also appears to be conservative given improvements in the quarter, Carden el al wrote. The high end of managementâs revenue guide assumes general stability in the growth rate across all three major segments, while operating margin guidance seems to imply some give back in gross margin.
Seeking Alpha analyst Michael Wiggins De Oliveira: Neutral
Analyst Michael Wiggins De Oliveira upped his Sell rating on the retailer to Neutral. He initially believed that AWS would experience a significant slowdown in revenue growth rates and was taken by surprise when Amazon's (AMZN) retail operations exceeded expectations with strong growth.
âOn the negative side, AWS revenue growth rates have decelerated to 12%, losing market share to competitors. Profit margins have also compressed,â the analyst wrote in a note. 
âOn a positive note, Amazon's North America and International businesses are expanding their profit margins, and the company's revenue growth rates are set to reaccelerate.â 
âIf Amazon can convince investors that it's getting back to growth mode, the multiples that investors can be willing to pay for a reaccelerating tech company, particularly one as successful and well-known as Amazon can range quite significantly.â
AMZN shares are up 2.6% over the past 12 months and up 67% so far in 2023.
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