Amazing Amazon


For some time, we have believed that Amazon margins would grow slower than bullish expectations and had been concerned with a deceleration in revenue. Clearly, we have been too pessimistic on the near-term leverage in model as margins are expanding much faster than we thought. Just as impressive, the rebound in revenue growth outside the US and the remarkable AWS revenue growth in Q2 have both been a surprise and those trends appear sustainable, to us, over the next few quarters.

Upgrade to OW: We normally shy away from ratings changes on quarters as we tend to wait for the stock to settle after a big move and then re-evaluate. This quarter was too good in our view to wait and, despite the sizable move in the stock already this year (and aftermarket), we now believe there is even more upside.

Amazon doesn’t pay a dividend. Nor does it spend money on share buybacks. And yet, all the stock does is go up and up and up. This morning, it might open a hundred dollars higher than where it closed yesterday on the heels of its latest earnings blowout. This is the 3rd straight earnings report where AMZN will gap up substantially in its wake. Even the bulls can’t keep pace with what’s going on here.

Everything about the company’s business is accelerating – revenues, operating margins, unit growth, cloud adoption, geographic expansion, etc.

The company is an example of what can happen when a company invests in the future and ignores short-sighted criticism from Wall Street. The stuff Amazon had been spending money on for years is now paying off in a big way. Analysts are calling this the “harvesting” part of the cycle as they raise their price targets and upgrade the stock. Many of the same analysts were frustrated by all the time Amazon spent planting seeds and tilling the soil. Lucky for shareholders, Jeff Bezos didn’t listen.

Amazon will likely go through future periods of heavy investing. The stock will hit rocky times and the critics will return – “When are they going to get a handle on expenses?”. Lucky for shareholders, Jeff Bezos still won’t listen.

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