Amazon's second quarter net sales of $134.4bn were much better than expected, and reflected an 11% increase, ignoring the effect of exchange rates. The important North America retail business saw net sales rise to $82.5bn, up from $74.4bn. There was also growth in the International division. Amazon Web Services (AWS) saw net sales growth slow to 12%.
Higher sales meant profits improved overall for retail. But AWS again made up the bulk of operating profit - contributing $5.4bn of the $7.7bn group total. This was more than double the $3.3bn total in the same period last year.
Amazon said $100m is being invested in its AWS Generative AI Innovation Center.
Amazon generated free cash flow of $7.9bn, compared to an outflow of $23.5bn in the second quarter of 2022. There was net debt of $11.9bn at the end of the quarter.
Net sales are expected to be between $138.0bn and $143.0bn next quarter, with operating profit of $5.5 - $8.5bn.
Amazon shares rose 8.2% in after-hours trading.
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Our view
Amazon Web Services (Amazon's substantial cloud business) is the part of Amazon that has the market hot under the collar. The fact growth is slowing shouldn't be a cause for concern. A realistic awareness of more cautious spending from corporate customers and the reality of how, and crucially, when AWS products will fully benefit from the Artificial Intelligence (AI) boom all mean a slowdown doesn't mean panic stations.
As companies increasingly harness new technologies and infrastructure, there are AWS products poised and waiting to be adopted. While there are some grumblings about the likelihood of a sustained reacceleration in AWS, Amazon bulls will argue that while AWS doesn't immediately benefit from booming demand for language-based models like those from OpenAI, it does stand to gain from other apps using things like Stability AI, the deep learning, text-to-image model. Ultimately, we think AWS' position in the AI and cloud stack is a positive one, and the $100m investment announced in AWS' generative AI products speaks volumes to the expected pipeline of demand.
We're also supportive of growth in services, like Prime, and the group's advertising arm. It's been impressive to see the latter making progress. Troves of data footprints and millions of customers ready and willing to click buy are a marketer's dream.
But for all these areas, Amazon's core retail division still carries a lot of weight. And the picture here is improving. Margins buckled in recent memory as consumer spending slowed compared to the days of lockdown. But gargantuan cost saving efforts, including lay-offs, coupled with a rebound in spending, has seen profits in this part of the business start to hold their own again. But things are far from solved. The consumer environment remains very tricky indeed and this could yet worsen, so this will be something to monitor.
Digging down under the hood and it's nice to see free cash flowing through the business. This helps support investment for growth.
While the valuation has come down some way from its headiest days, Amazon has still seen a substantial uplift since the start of the year. We think that's largely a reflection of the prospects for AWS, and there's no denying that, plus other services areas, have huge growth potential. But with the e-commerce arm under pressure, and a level of uncertainty in near-term cloud demand, there could be rocky times ahead.
Amazon key facts
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