AMZN Showing its A.I. 'Spending Is Justified'

break down Amazon's earnings report and the market's reaction to that. The big picture. Arun Sundaram is with us, senior vice president of equity research at Cfra. Thank you so much for being with us. Definitely part of the takeaway is that CapEx spending is a okay as long as you deliver. Is that what you got from the Amazon earnings? I'm sure you got so much more. But let me start with that. Yeah. No, I think I think the big takeaway from the Amazon earnings is that, all this all the spending is is justified. You know Amazon is not spending like a drunken sailor. In fact I think their spending is, could be conservative, meaning that if they were spending more, their growth rates could be even faster than we saw. So I think that's why the stock is up today because, you know, the company did raise their CapEx guidance for 2026. They upped it from 200 billion to 220 billion. You have the stock continue to climb even higher. So I think what this tells us is that investors are finally getting comfortable with this level of, what this level of spending from Amazon because it's, it's delivering in terms of higher, in terms of faster revenue growth and even margins. I think one, one surprising upside this quarter was the fact that AWS operating margins, were strong at around 38%. I think investors expected some weakness in that margin line given how much they're spending. But, we, we saw strong margins and fast growth. So I think that's why the investors are giving Amazon an A plus today. How do you get, I know you have a strong buy rating and a price target of 335. And when Amazon is trading at 270 and I assume that's a 12 month price target, how do you get to the 335 level? What will be the catalyst to get it up there? Yeah, I mean, one of the reasons we have a strong buy rating is one, we think the valuation multiples are, are cheap. Amazon's trading in a mid 20s multiple right now. Yeah. This is a company that's growing normalized earnings at about a 20% plus rate. That's faster than just about every mag seven company there. There is. So it's growing fast. It's growing earnings faster than peers, yet its multiples are still kind of hovering in that mid 20s range, which we think can go even higher. So that's one reason we like the stock. And another reason is we think estimates are just low. If you look at earnings expectations over the next several years. I think earnings expectations are low. You know, especially after, you know, last night's print, I think everyone's going to be taking up their, AWS, growth rate expectations for, for 2027 and even 2020, 2028. So when Andy Jassy said the second half is much more coming for customers, what can we expect? What do you think he meant by that? Yeah, I think we can see further acceleration in AWS. Like I said this this quarter, we saw 37% AWS growth. That's a nine point acceleration from Q1, 28% growth rate. Analysts and investors are expecting like a low 30% growth rate this quarter. We got 37%. So now it's just a matter of time, I think, before they hit 40% growth in that, in that AWS, that AWS business. And clearly that's, that, that's a business that's firing on all cylinders. It's, it's rightfully getting all the attention. But we don't, I think we don't talk about the other businesses at Amazon enough. Like their retail business, for example, is also doing extremely well. The advertising business is also doing extremely well. And even Amazon has some of these, I call them other bets that most analysts are not even modeling into, into the, into the stock right now. Things like, autonomous vehicles, their satellite network, they're, they're launching satellites into the sky trying to compete with Starlink. These are just, I think, incremental optionality for the stock. So, that's why we have, we have a strong buy rating and a 335 target price. Yeah. I mean, you talk about retail doing well, Prime video ads that continue to scale. And the, you know, the ad business, the retail business, but what about what goes on with anthropic? You said, you know, the outlook here reflects unrealized gains on anthropic. What could that provide in the years ahead? Yes. I mean, one of the reasons why their EPs, their, their, their GAAP EPS this quarter, was, you know, up, I think like 200 plus percent or something like that. Amazon obviously has a very large stake in anthropic, which is private right now. They might go public later this year. But every quarter they mark that investment to fair value and the valuation of anthropic keeps keeps rising. So this past quarter, I think they recognized something like a $50 billion plus unrealized gain on that investment. Anthropic, it's more of a one time game gain. It's not not a, you know, something that we should, we should see that's going to be reoccurring. So, you know, that's one of the reasons why their, you know, their, their GAAP EPS is, is significantly inflated this year. Whereas, you know, next year, if you're just looking at GAAP earnings, not, not adjusted earnings, just GAAP earnings, GAAP earnings next year are probably going to be decreased year over year just because of these one time gains that we're seeing in anthropic in tech overall. We have the mag seven. And you have obviously memory. And we think about the chips and there's so many all things AI in the data centers. What are some of your favorite names these days that you're really touting? The buys? I want to make sure we don't miss some of the other stocks or companies that you love fundamentally. Yeah. I mean, we love the hyperscalers still. I think there's there's this reversal trade that's going on in the hyperscaler space. You know, most of these stocks, Google, meta, Microsoft, Microsoft has been one of the big laggards this year. Amazon, you know, hasn't really had a great year this year as well. And I think we're starting to see that reversal trade, kick in now because, you know, clearly these companies are seeing some extraordinary growth rates, which will likely continue. So we have a strong buy rating on Amazon. We have a strong buy rating on meta. We have a strong buy rating on Microsoft as well. We have a buy rating on Google. So we really do like the hyperscaler space. You know, I think they're relatively, less risky. Long term investments for, for, for investors. And I also do like, we do, like the valuations across the hyperscaler space multiples have come down, I think significantly, across the space this year. But, but yeah, Amazon is probably one of our top picks, across the hyperscaler space. Yeah. Understood. And so when meta, you know, had the down arrow, you must have thought that was a great opportunity because you said you do have a strong buy there. Very interesting. Thank you so much. It's great to chat with you. Appreciate it. And a buy on Google. The other ones were strong buys for Microsoft, Amazon and Meta. Arun Sundaram, great to chat with you. Really