Alex Cho
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My Initial Take on Amazon Earnings for Q2'16

Amazon reported revenue of $30.4 billion, which blew past the consensus revenue figure of $29.55 billion. Furthermore, the stock is exhibiting a lot better gross margin/operating margin leverage than what forecasts implied.

The improvement in financial performance more or less reasserts my case for investing into the company, as it was broadly anticipated that AWS margins would expand given the improvement in datacenter efficiency, drop-off of CAPEX and heightened adoption for hybrid cloud utilization among commercial enterprise.  Furthermore, the EMG (electronics and other merchandise) segment continued to outperform reasserting my optimism on core retail, as Amazon Prime continues to drive retail volume across the platform, with 3rd party sellers contributing significantly to the inventory selection and total gross merchandise volume across the retail platform both domestically and internationally.

The company’s reported operating margin improved considerably as operating margins and gross margins were 4.2%, which compared to prior quarter of 3.7% which translated into a sequential 40 basis point improvement, which is quite significant given razor thin margins, and impressive retail volume across all geographies. The company reported $1.285 billion in operating income, which was an impressive leap of 177% y/y. The improvement in operating results resulted in diluted EPS of $1.78 for Q2'16, which compared to Q2'15 at $0.19, which translated into a y/y improvement of 9.36x, or 1,036% in percentile terms. The consensus figure for Q2'16 diluted EPS was $1.11, but with Amazon reporting results $0.67 above analyst estimates, it’s sort of surprising that the stock isn’t exhibiting even more momentum.

That being the case, I’ve been anticipating Amazon to generate substantial operating leverage from its North America business for quite a while now, and with margin expansion continuing at a blistering pace, investors should double down on Amazon. The improvement to profitability, incremental growth opportunities both geographically and in new product segments reasserts the fundamentals of investing into the stock.