Investors Are Wrong About Amazon
Amazon: Q2 results and updated valuation
Expectations heading into Amazon’s earnings were set high by Google and Microsoft.
Their cloud divisions posted growth of 32% and 26%, respectively. Microsoft’s Azure crossed a $75 billion annual revenue run rate, up 34% year-over-year.
By comparison, Amazon Web Services grew just 17.5%. And despite AWS still being the largest cloud platform by a wide margin, that figure disappointed investors.
The stock is down nearly 7% after-hours as I write this.
But here’s the thing: investors are short-sighted.
This was one of Amazon’s best ever quarters. Growth reaccelerated, margins expanded, and execution was strong across every segment. The AWS backlog grew 25% to $195 billion, a clear indicator of sustained, long-term demand.
Let’s unpack Amazon’s results, and walk through my updated valuation.
Amazon Second-Quarter Results
Amazon’s Q2 revenue reached $167.7 billion, up 13% year-over-year (12% ex-FX), easily surpassing guidance of $159-164 billion, as well as analyst expectations of $162.09 billion. This result comes right after a quarter where revenue grew ‘just’ 9%.
Operating income grew to $19.2 billion, up 31% YoY—also above guidance of $13-17.5 billion.
Segment Breakdown
Revenue was strong across every segment:
North America: $100 billion, up 11%
International: $36.8 billion, up 16% (11% ex-FX)
AWS: $30.9 billion, up 17.5%
By business segment:
Online Stores: $61.5 billion, up 11%
Physical Stores: $5.6 billion, up 7%
Third-Party Seller Services: $40.3 billion, up 11%
Advertising: $15.7 billion, up 23%
Subscription Services: $12.2 billion, up 12%
Other: $1.5 billion, up 19%
Operating income by segment was mixed:
North America: $7.5 billion, up 48%
International: $1.5 billion, up 448%
AWS: $10.2 billion, up 9%
The obvious outlier is AWS, which grew revenue by 17.5% yet operating income by just 9%. The segment’s operating margin fell from 39.5% last quarter to 32.9% this quarter. This is a result of increased capital investments, which led to higher depreciation expenses, and a seasonal step-up in stock-based compensation.
As a reminder, capital expenditures last year reached $83 billion, the majority of which went towards AWS. Obviously, depreciation will increase significantly right after such major investments. And since Amazon is still reinvesting heavily, we should expect continuous margin pressure.
“We will continue to invest more capital in chips, data centers, and power to pursue this unusually large opportunity that we have in generative AI.”—CFO Brian Olsavsky.
Amazon has never really cared about short-term margins. Investors in the business still don’t seem to grasp this.
North America’s operating margin, however, did increase—from 5.6% a year ago to 7.5% today. A 2% difference at Amazon’s scale is huge. The International segment is also turning increasingly efficient: the margin reached 4.1%, up from just 0.9% a year prior.
But International is still far from its full potential. Management explained how the segment consists of two main pieces: established markets like the U.K., Germany, and Japan—with similar margin profiles to the U.S.—and newer markets. Amazon entered eight new countries over the past five years, which are all at different points in terms of profitability.
AWS
Getting back to AWS: the business now has an annualized run rate of $123 billion. Microsoft’s Azure is at $75 billion and Google Cloud at $50 billion.
It makes complete sense for AWS to grow slower on a percentage basis.
Importantly, the backlog grew 25% YoY to $195 billion, signaling extremely strong demand. Andy Jassy emphasized that 85-90% of IT spend is still on-premises versus on the cloud.
“In the next ten to fifteen years, that equation is going to flip, further accelerated by companies’ excitement for leveraging AI. So AWS has significantly broader functionality, stronger security and operational performance, and much deeper experience helping enterprises modernize their infrastructure bodes well for the AWS business moving forward.”
AWS is still in an early phase, despite already being a mind-bogglingly large business.
Online Retail
Globally, Amazon held its biggest Prime Day ever—in terms of sales, items sold, and Prime signups. The company’s everyday essentials now account for one in three items sold globally.
And for the eighth year in a row, Amazon was ranked the lowest-priced U.S. retailer.
Meanwhile, the company is seeing significant efficiency improvements in delivery:
+40% increase in orders moved via direct routes (fewer stops)
-12% reduction in package travel distance
-15% reduction in handling touched per unit
Improved order consolidation and units per box
“Taken together, these improvements are making the network faster and structurally more efficient.”—CEO Andy Jassy
A key part of this increased efficiency and productivity depends on automation and robotics. This quarter, Amazon deployed its millionth robot.
It also launched Deepfleet, an AI traffic management system to coordinate robot movements to find optimal paths and reduce bottlenecks. It’s already improved robot routing efficiency by 10%.
Advertising
Another standout this quarter was the advertising segment, which grew by 23% YoY to $15.7 billion. Amazon advertises across its entire ecosystem: the Amazon marketplace, Prime Video, Twitch, Fire TV, and now also live sports (NFL, NASCAR, NBA). In June, Amazon announced a partnership with Roku, which will give advertisers access to 80 million connected TV households.
Advertising is an important piece of overall profitability, and seeing it grow at this pace is remarkable. For comparison, the segment grew 19% in Q1 2025 and 20% in Q2 2024.
Project Kuiper
Project Kuiper is another exciting piece of the business. While not commercially available yet, a large number of enterprise and government customers have already signed agreements.
Project Kuiper is Amazon’s low-Earth orbit satellite broadband network, which will provide high-speed internet access globally.
Here’s Jassy’s update on the business:
“I would say that as we get our constellation into space, there will really be two players that have what I would consider modern technology in low Earth orbit satellite. One is the incumbent [Starlink], and the second will be Project Kuiper. I think we will have a meaningful differentiation in performance... I think Project Kuiper will be advantaged.
I also think the pricing is going to be very compelling for customers. If you think about the three key customer segments—consumers, enterprises, and governments—we have very strong relationships with all three... Given our consumer businesses and AWS, that’s a big deal.
A lot of what enterprises and governments want to do when they take data down from space is put it into the cloud to run analytics, AI, and other operations. The fact that Kuiper and AWS are so seamlessly connected is very attractive...
We haven’t launched yet, but the number of enterprise and government agreements signed is impressive. We’re working hard to get the satellites into space. We’ve had some delays with rocket providers, but we have most of the launches secured... and we’re hopeful to get into commercial beta later this year or early next.”
As Jassy explains, Project Kuiper will be tightly integrated with AWS, which should be a very attractive value proposition. Jassy is confident their offering will be stronger than Starlink, currently the market leader. Project Kuiper is set to launch later this year or early next.
Capex, Cash Flow, and Q3 Outlook
Capital expenditures this quarter remained high: net capex was $31.4 billion. The company is well underway to invest over $100 billion in capex for the full year.
Brian Olsavsky said capex in Q3 and Q4 will be similar to Q2, confirming Amazon will easily surpass $100 billion. The majority will go to AWS, tech infrastructure, and the fulfillment and transportation network.
Free cash flow for the quarter was slightly negative—again, a result of reinvestment, not a lack of profitability. Trailing twelve-month free cash flow now sits at $18.2 billion, down 66% from $53 billion a year ago. Trailing twelve-month operating cash flow, however, reached $121.1 billion, up 12% YoY.
Amazon also provided its Q3 outlook:
Revenue: $174–179.5 billion, implying 10–13% growth
Operating income: $15.5–20.5 billion, vs. $17.4 billion in Q3 2024
The operating income guidance is one the low side, but I think a big reason is increased depreciation. That should continue to weigh on the income statement for some time. It’s the cost of reinvestment, so I’m okay with that.
Now, let’s move on to the valuation.