Amazon's share price has risen 54% sequentially this year. The company reported very solid second-quarter earnings, beating analysts' estimates.
Revenues grew 11% to $134.4 billion in the second quarter, above expectations of $131.6 billion. More importantly, Amazon saw a significant improvement in operating income, which grew from $3.3 billion to $7.7 billion, primarily due to the impact of cost-cutting in its North American segment.
AWS delivers high profits
Amazon attracts most of the attention for its e-commerce business, but Amazon Web Services (AWS), its cloud infrastructure giant, has long delivered a high share of profits. In fact, it has been the only consistent source of profits for the company throughout its history, as e-commerce performance has been less consistent.
In the second quarter, the AWS division generated $5.4 billion in operating income. However, AWS's growth has slowed significantly over the past two years, which is one reason the stock is down from its pandemic-era peak.
Revenue at AWS grew 12% in the second quarter, but CEO Andy Jassy said: "Our AWS growth has stabilised as customers have started to shift from cost optimisation to deploying new workloads." This is an important shift that should help re-accelerate growth at AWS, which will significantly boost profits.
Amazon ecommerce profits are back
In North America, it reported operating income of $3.2 billion, up from an operating loss of $627 million, with its international operating loss reduced from $1.8 billion to $895 million. The advertising business, which is included in these segments, also delivered strong growth with a 22% year-over-year increase in revenue to $10.7 billion.
Management commented on earnings that macroeconomic challenges are easing, but they still see investors focusing more on value stocks. With an improving macro climate, a still strong advertising business and rising profitability, the e-commerce division also looks set to boost the stock in the coming months.
Amazon's headcount continues to decline
CEO Andy Jassy has embarked on Amazon's most aggressive cost-cutting campaign in its history. It's no secret that Amazon has "bloated" itself with experiments that have never paid off and a Prime Video division that costs $15 billion a year but directly brings in little money.
Jassy also announced plans to lay off roughly 27,000 corporate employees earlier this year, and the company's headcount fell for the third consecutive quarter, down 4%.
However, this approach also shows that Jassy wants to be more judicious in its hiring, which should also help the company maintain profitability as it grows.
Time to buy Amazon stock?
Second quarter results show that efforts are already starting to bear fruit and profit margins should improve as the economy improves and management further examines its costs.
With high-margin businesses like AWS and advertising, there's still a lot of room for Amazon to expand its margins. Based on this data, Amazon stock should be a part of every investor's portfolio, whether it's a smaller or larger holding.
