Why I'm Buying More Amazon - Full Earnings Analysis

A few weeks ago, I made a video explaining why I thought Amazon was the most obvious buy in the market at the time. It really came down to the fact that Amazon has so many growth levers and the underlying business has been growing significantly faster than the stock over the past about 5 years. And this has led to the stock becoming extremely cheap in my opinion due to its multiples continuing to decline. Well, today Amazon stock is up over 15% after announcing its second quarter earnings results yesterday after the close. And as promised in today's video, I am going to be going through everything investors need to know about the earnings report and also explaining why the market responded so well. This was an action-packed earnings report that had a lot of highlights, especially in the conference call, which we are also going to be going through. But before we get into Amazon's earnings analysis, I quickly want to let you know that we have a lot more earnings coming next week, including Marcato Libre, which is one of the main stocks that I have in my portfolio and that I follow here on the channel. So, if you want to continue getting notified when I post my earnings analysis videos, then make sure to hit that subscribe button and also the bell notification beside the subscribe button so you can actually get notified when I post my videos. But with that being said, let's now hop into Amazon's Q2 earnings analysis. All right, so starting from the top, we can see that revenue grew 20% year-over-year, which is insane because Amazon is doing $800 billion in annualized revenue now. So despite Amazon's massive scale, it still grew the top line by 20%. North American revenue came in up 16%, international revenue is up 15% and AWS is up a whopping 37% this quarter. This is a massive reaceleration to AWS's business. Operating income also came in at 27.5 billion for the second quarter, which is up more than 30% on a year-over-year basis. Operating cash flow grew 33% in the trailing 12 months. And as I have been saying on my channel for over a year now, this is the main metric that I am focusing on for Amazon and all of the other hyperscalers specifically while they are investing so much money into capex. And this is because these business's free cash flows are now being suppressed and even going negative. In fact, Amazon has now produced negative $7.6 billion in trailing 12 months free cash flow. So, the business's free cash flows are now negative. But personally, as an Amazon shareholder, I don't mind this at all because I believe that they are getting a very high ROI on their capex, which we are going to explore later on in this video. But at the bottom of the screenshot here, we can see that Andy Jasse said, "AWS is booming, growing 36.7% year-over-year in the second quarter. Our fastest growth in 18 quarters, and our AI and chips businesses eachclipsed run rates of more than 25 billion. Advertising had another strong quarter with 26% year-over-year growth. There's a lot to be excited about, and we have much more coming for customers in the second half of the year and beyond. Moving on to the next screenshot. This one shows us all of the different beats and misses from Amazon's quarter specifically. And we can see that revenue across the board beat AWS's growth rate also beat by 5.4% and its margin beat by 6%. So this was a standout quarter for AWS specifically. Amazon's advertising business growth rate also beat by 2.4% and it is starting to accelerate quite a bit again up to 26% growth. So across the board this was a pretty great quarter for Amazon. Now, in addition to Amazon's financial metrics being very strong this quarter, there was a lot of updates to the business. And I'm just going to rapidfire read some of the highlights here. Exceeded a $25 billion annual run rate for AWS's AI business, growing tripledigit percentages year-over-year. Exceeded a $25 billion annual run rate for its chips business, growing tripledigit percentages year-over-year. Released Graviton 5 into general availability. Graviton delivers up to 30 to 40% better price performance than comparable instances. And Graviton 5 delivers up to 25% better compute performance than Graviton 4. Added over 10 fully managed foundational models to Amazon Bedrock. Previewed AWS Continuum, which discovers, prioritizes, validates, and remediates code vulnerabilities. launched Amazon supply chain services so any business can move, store and deliver everything from raw materials to finished products using the same supply chain that supports Amazon. Reached $60 billion in annualized gross sales for Amazon business and continued to expand our selection. Introduced the next generation of Proteius, an autonomous robot that assists Amazon fulfillment centers. grew the number of new customers for Amazon Pharmacy by more than 2x in the first six months of the year. Expanded Ads Agent, an AI powered tool that simplifies planning, launching, and managing advertising campaigns. Completed four additional launches of Amazon Leo. Received approval from the National Highway Traffic Safety Administration for Zuks to charge for rides. So, as you can see, there is a lot going on within Amazon's business. Their autonomous vehicles can officially start charging for rides. They had more launches of Amazon Leo and they are actually going to start charging for Amazon Leo2 paying customers at some point before the end of the year. Their Graviton CPUs are seeing tremendous demand. The chips business is now at over $25 billion in run rate and it's more than doubling on a year-over-year basis, which makes it one of the largest chips business in the entire world. And their AWS AI business is doing the exact same thing. It's at a $25 billion annual run rate and it's more than doubling on a year-over-year basis. So, Amazon is becoming this massive technology ETF. That's pretty much how I view it and it has so many different growth initiatives that are taking off and that is why the business is continuing to accelerate even at its massive scale. So, this was a fantastic quarter for Amazon in my opinion. Getting back over to our screenshot, they then provide us with an update for their second quarter guidance. And here they say net sales are expected to be between 197 and $22 billion or to grow between 9% and 12%. Excluding the impact of Prime Day in both 2025 and 2026, third quarter 2026 year-over-year growth would be nearly 400 basis points higher, which would mean that growth rates would be 13 to 16%. Operating income is also expected to be between 22.5 and 26.5 billion compared with 17.4 4 billion last year which means that operating income is projected to grow by more than 30% next quarter again. Now moving on to the next screenshot. This is the cash flow statement and the main things that I want to focus on are the operating cash flows. So operating cash flows for this quarter were up 40% year-over-year and operating cash flows are up 44% year-to date. So the amount of cash that Amazon's business is generating is growing significantly again at 40%. However, the capital expenditures came in at $54.2 billion this quarter. And in the trailing 12 months, Amazon has spent $173 billion on capex, which means that this quarter and for the trailing 12 months, the business is now producing negative free cash flow. And to supplement this, Amazon is leveraging up the balance sheet and taking on some debt. This quarter, they increased their debt by 13.6 billion. And in the trailing 12 months, they raised $82 billion of debt. Now, personally, I am not too concerned about this because Amazon's underlying business is producing a lot more cash on a year-over-year basis. And I do believe that they are going to get a high ROI on this debt. Or to put it another way, if Amazon can lend money at 4 to 5% and then produce 20% plus returns on that capital, then it's actually still producing a positive return for shareholders. And I do believe that they are getting above 20% returns on their capex. Now, this next screenshot has my favorite table for Amazon's overall business, and it shows us the different business segments and how they are growing. And here we can see that online stores, third-party seller services, advertising, subscriptions, and AWS are all growing double digits and are all accelerating. The advertising business is up 26% year-over-year and accelerated from 22% last quarter, which means that this was a very strong quarter for Amazon's advertising business. And its advertising business is becoming huge, doing about $80 billion in annual revenue. Now, AWS was really the standout, though again with that 9% quarterover-arter acceleration while doing over 40 billion in quarterly revenue. Now, that is truly incredible. And Amazon is achieving all of this while only growing its headcount by 3% year-over-year as well. So they are seeing a lot of efficiencies and their headcount is no longer growing with the revenue or the cash flows of the business. And I think that this is providing more operational leverage for the company. This next screenshot shows the incremental revenue additions to Google Cloud and AWS. And AWS actually added more revenue than Google Cloud this quarter. But Google Cloud's growth rates look so much higher because they are working from a smaller base. But it's still interesting to note that AWS is actually adding more revenue on a net dollar basis than Google Cloud is. This next screenshot shows us the year-over-year revenue growth rates for AWS, Azure, and Google Cloud. And as I said, Google Cloud has the most impressive year-over-year growth rate at 82% which is just ridiculous. but it is on a much smaller base than AWS and Azure. What I do think is very impressive is AWS's growth rate is starting to catch up to Azure despite it being the largest cloud provider out of this group by far. This is extremely impressive and bullish for AWS in my opinion. All right, now let's move over to the conference call highlights. And I think that this is where it really starts to get fun. So I'll read the underlined segments in these screenshots. And here Andy Jazzy said, "AWS is now a $169 billion annualized revenue run rate business, which for perspective would place it 24th on the Fortune 500 list if it were a standalone company. Our chips business now has an annual revenue run rate of over 25 billion, growing tripledigit percentages. Our AI revenue run rate climbed significantly quarter- is now also over 25 billion, growing tripledigit percentages year-over-year. This is an advantage for AWS as our Graviton chip is the strongest CPU chip offering up to 30 to 40% better price performance than other options. So the highlights here are that AWS would be number 24 on the Fortune 500 again if it were a standalone business. The chips and AI businesses are doing over 25 billion in annualized revenue and more than doubling on a year-over-year basis. Graviton is the best CPU chip on the market right now. And this is part of the reason why AWS is seeing so much growth is because Amazon is dedicated to offering the best compute prices and their internal proprietary chips are allowing them to do so. Moving on to the next screenshot, this is probably the most important passage from the entire conference call and probably the main reason why Amazon stock is up 15% today. If you take anything away from this video, let it be what is said in this passage here. Now, let me talk for a second about how we see this investment playing out. Earlier this year, we said we plan to invest approximately $200 billion in cash capex in 2026. The majority of which to support AI and AWS. We have clear line of sight to strong financial returns. I'll explain why. There are two major parts of the investment, the data center and the servers and networking equipment that go into them. Servers and networking equipment operate on a shorter cycle. We typically purchase these a few months before putting them into service. So we have strong visibility into customer demand before we trigger the spend. If the demand isn't there, we will not spend the capital. For servers and networking equipment, on average, it takes a little less than 3 years to break even on the investment. The servers currently have a useful life of at least 5 to 6 years, and most of our AI capacity these days is being contracted for at least 5-year terms. That means that we're driving significant free cash flow on the servers and networking equipment in the two to three years after we break even. It's also worth noting that AWS has a strong track record of pulling forward break evens on server equipment where we've already made meaningful progress and finding ways to extend the useful life of this equipment without sacrificing customer experience. Andy broke down the ROI and timeline for the returns of AWS and the capex spend. And he said that it takes just under 3 years to break even on the networking equipment capex and it has a useful life of 5 to 6 years. AWS has also historically broke even faster than that and has been able to extend the useful life of this spend beyond 6 years. So, I went over to Claude and I said that Amazon is spending $200 billion on capex and receiving $66.7 billion in annual cash flow on that spend over the next 5 years. Because at the $66.7 billion in annual cash flow, it means that they would break even on their $200 billion of capex within 3 years exactly, which is basically the numbers that Andy Jasse is giving us. And then I asked Claude to give me the annual return rate on the $200 billion of capex based on these numbers. And Claude spat out that it would be roughly 20% per year or about 19.9%. Then I told Claude, now what do the numbers look like if the annual cash flow is 70 billion and we extend the return period out to 6 years on the same initial investment? The payback period would be about 2.86 years. So just under 3 years which is what Andy Jasse said and the annual return rate extending the time frame out to 6 years would be 28% or about 27.5%. Then Claude said once the assets paid back in year 3 every additional year of cash flow it's close to a pure return. So stretching 5 years to 6 years moves the annual return rate far more than the modest bump in annual figure does. Now, what this basically means is that if Amazon can actually extend the time frame and get a six-year working life from the networking equipment that they're purchasing, then the way that Andy Jasse laid it out means that Amazon is generating a 28% annual return on the capex that they are spending today. Getting back over to the conference call, then Andy Jasse said, "We long believed AWS could become a few hundred billion revenue business, and now we believe it'll at least double that and very possibly could be a trillion annual revenue business one day in the future." So, Andy Jasse believes that long-term AWS has a possibility of hitting $1 trillion in revenue, which is more than all of Amazon's business does today. All right. Now, this is the last screenshot from the conference call that I want to talk about. And here Andy said, "On the question about selling tranium, we're quite excited about what's happening in our chips business. As I mentioned earlier, it's over $25 billion in annual revenue at this point. We just have an incredible amount of demand for Tranium. There are a lot of customers who are very excited about using it in the form that we're providing right now. We do have an increasing number of customers who are interested in us providing the tranium chips to them separate from our cloud and we're actively having those conversations and exploring and I expect there's a real chance that we will do this in the future. So here Andy is saying that tranium is seeing incredible demand and that Amazon believes there's a very real chance that they will sell tranium chips to third parties eventually but it just hasn't yet. And when Amazon does decide to sell these tranium chips, then I believe that it will be another revenue accelerant for the business. All right, now let's head over to Stock Unblock and take a look at some of Amazon's metrics. And the first one is its remaining performance obligations in this quarter. Amazon now has RPOs of $496 billion. And you can see just how quickly the RPOS are growing. In the third quarter of 2025, they were sitting at 200 billion. And they are now up roughly 2.5x to 496 billion. And this is one of the main reasons why Amazon is investing so much money into capex is because their backlog is absolutely exploding. So there is a lot of revenue sitting there waiting for Amazon to capture. The next thing that I want to take a look at is Amazon's advertising business. And in the trailing 12 months, it has now done $76 billion of revenue. And if we take a look at the revenue growth rates, we can see that it has been consistently accelerating since the first quarter of 2025. And in the trailing 12 months, the revenue growth rate is now at 24%. And as I said, this is now an $80 billion revenue run rate business that is extremely profitable, growing 26% year-over-year and accelerating. So, I think that Amazon's advertising business alone is extremely valuable, and I think that this will be a massive business over time. All right, now let's get over to AWS revenue. And it has now done $148 billion of revenue in the trailing 12 months. And if we take a look at a year-over-year change, you can clearly see that it is reacelerating in a very big way and has grown 27.5% over the trailing 12 months. If we take a look at a quarterly basis, you can see just how significant the reaceleration has been. And it seems like the rate of acceleration is actually picking up. This is extremely bullish for AWS. And I also believe that it shows us very clearly that Amazon is getting a strong ROI on the capex that it is doing. Let's now take a look at operating cash flow. And in the trailing 12 months, Amazon has produced 161.4 billion of operating cash flow now. And it is growing and hitting all-time highs. Amazon's overall revenue growth rates are also very clearly accelerating and have been consistently accelerating since the first quarter of 2025. And in the trailing 12 months, they are now at 16%. So, Amazon's overall business as a whole is very clearly accelerating and I believe that this is another suggestion that the capex is paying off. Taking a quick look at margins now, Amazon's gross margin hit an all-time high of 50.8% in this quarter and as AWS and the advertising, which are highly profitable businesses for Amazon continue to make up more of the revenue, I believe that the overall margins of the business will continue to expand. Amazon's operating margin also hit an all-time high of just over 12% this quarter, which I believe is proving that my thesis here is correct. And lastly, we can see that the operating cash flow margin came in at an all-time high of 20.8% in the trailing 12 months now. So, Amazon's profit margins are actually expanding as the revenue growth rates for the business are accelerating at the same time. And I believe once again that this is a suggestion that the capex is producing a positive ROI and growing the business in a positive way. All right, now let's wrap up the video by talking about Amazon's valuation. And surprisingly, even though the stock is up 15% on the day, I think that it is still undervalued. Just taking a quick look at Amazon's valuation score here on Stock Unlock, you can see that it is still excellent, represented by the dark green line. And as I said earlier, this is because Amazon's underlying fundamentals are growing faster than the stock price is. You can see that back here in 2021, Amazon stock was actually quite expensive. But then it had that correction in 2022 to 2023. And since then, the stock has looked pretty reasonably valued and now it is actually looking quite undervalued. As I have said earlier, I use Amazon's operating cash flow to value the business. And you can see that even after the stock price boost of today, it's still trading for an price to operating cash flow of 18 in the trailing 12 months now. And you can clearly see that this is well below Amazon's historical averages. Its previous low before it started to sell off in 2023 was 19 times operating cash flow in 2016 and it's even below that today. I also updated my DCF on Amazon and here I am saying that Amazon will grow its operating cash flow by 20% annually over the next 3 years which I think is pretty pessimistic at this point because Amazon is consistently growing its operating cash flows by 40% on a year-over-year basis now. So this would be a large deceleration from what the business is currently seeing. And with all of the demand and growth to AWS, I think they're going to do well over 20% annual growth over the next 3 years in this DCF. I am also saying that Amazon will trade for 20 times operating cash flow. And if we take a look at Amazon's price to operating cash flow chart here over the longer term, we can see that the median is 25.3. And my price to operating cash flow that I am using in my DCF is all the way down here represented by the blue line. So this is still well below how Amazon stock has traded historically. And with what I think are pretty pessimistic numbers in this DCF, I get a 22% compounded annual growth rate to the share price over the next three years, a 371 fair value, and a future stock price of 500 bucks by the end of 2028. So even with what I think are pretty conservative metrics in my DCF, I get a very strong return rate for Amazon over the next few years. And this is simply because the underlying business is seeing so much demand, so much momentum, and pretty much every single business unit is actually accelerating, which I think is incredible. So overall, I continue to believe that Amazon stock is undervalued. I thought that this was a fantastic quarter for the business, and this is one of the reasons why Amazon is the second largest position in my portfolio. I have added to my Amazon position significantly over the past year. And even though the stock is trading right near all-time highs, every way that I look at this business and the stock, I do think that it is surprisingly still offering value today. And I do think that the business will continue to accelerate over the coming years. So again, I thought that this was a great quarter for Amazon. And let me know what you think down in the comment section below. If you enjoyed this video, then also please remember to leave a like on it. And if you want to see more earnings analysis from me, then also make sure to subscribe to my channel and turn on the bell notifications. But with that being said, that's going to wrap up today's video. And as always, thank you so much for tuning in. I truly do appreciate it.