Apple Posts Massive Sales Beat While Amazon Underwhelms

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1:39Bloomberg Audio Studios. Podcasts. Radio. News. This is Bloomberg Business Week Daily. reporting from the magazine that helps global leaders stay ahead with insight on the people, companies, and trends shaping today's complex economy. Plus, global business, finance, and tech news as it happens. The Bloomberg Businessweek Daily Podcast with Carol Masser and Tim Stenebeck on Bloomberg Radio. Amazon shares down about 3 % in the after hours. The company sees third quarter operating income$15.5 to$20.5 billion. That was in line with estimates that are at$19.42 billion. I guess maybe on the lower side, it's not in line.

2:23And that could be why the stock is moving a little lower. Second quarter operating income, though, blew past estimates at$19.17 billion. Yeah, I do think that third quarter operating income could possibly, especially the downside or the lower end of the estimate, be problematic. Let's see what our team has to say. It is such a massive company, as you know. We need two Bloomberg intelligence analysts to really break it down. With us is senior technology analyst Anna Raghana and senior analyst for e-commerce and athleisure, Poonam Goyal. Anarag out there in our Chicago Bureau, and we've got Poonam in our Princeton Bureau.

2:56Hey, Anarag, I want to start with you because AWS is always so important when it comes to the top and bottom line here at Amazon. Walk us through what we got on that side of the business. Yeah, I mean, as you see, you know, they met expectations on AWS growth of 17 % in constant currency. But, you know, this is where we are saying that this is probably not good enough because Microsoft beat by a big number, Google beat by a big number, and the big question is going to be, you know, why didn't Amazon beat by a big number? And I think that's going to be probably one of the most important questions on the call, and we look forward to hearing what management has to say about it.

3:31I want to bring in Poonam here because one thing that I noticed when I was reading this in real time, the statement from CEO Andy Jassy, also president over at Amazon, was Poonam, how much he talked about the connection between the shopping experience for Amazon's core customer and artificial intelligence. Because up to now, and maybe I'm wrong, but I've thought about AI in the context of AWS. But what he's trying to communicate to investors is the effect that AI is having on how people are buying stuff. Is it actually doing that? Yeah, absolutely. You know, AI is a big deal in e-commerce and Amazon's been investing a lot to improve the customer experience.

4:11It starts with search, right? When you go to Amazon and you're searching something, they've just improved it. And they've also launched Rufus, which is their AI or your personal assistant. So that's really been helping shoppers and just figure out what they want to buy. You want to buy a microwave, but what microwave is better? The shopping assistant helps you not only bring choices forward, but also helps you navigate through the descriptions, the pricing, et cetera. So it really helps improve conversion. And that's where AI is helping on the shopping side. What metrics do you look at, Poonam, to make sure that the investments that they're making are actually leading me to spend more money on Amazon?

4:48So Amazon doesn't share all the metrics that we'd like to see. But we know that they've talked about conversion and how that's improving. So I think that's the number one metric. To any extent when we get color around that, I think that is what's most important. If you think back, online conversion, just broadly speaking, is in the low to mid-single legit range. So only about 5 % of shoppers that go online to shop actually transact. It's very, very low compared to a brick-and-mortar store. And every little that Amazon does on AI or anything else is going to help boost that conversion. It's higher on Amazon, of course.

5:22Let's remind everybody that in the aftermarket following earnings, Amazon down about 2.6 % here. It's only up about 7 % year-to-date. Right. Anurag, you know, you talked about, you know, the blowout numbers that we've gotten from the likes of Alphabet and others when it comes to cloud. AWS, as we said, the growth was in line with what the street was expecting. What might what why might they not have outperformed what we got from some of the other hyperscalers? You know, the first thing is they are much larger than all the others. Their run rate is over 100 billion dollars. So, you know, that's one factor.

5:56And, you know, to be very honest, growing 17, 18 percent at 100 billion is not a bad deal. But the second part is when you look at somebody like a Microsoft, they are getting a benefit of, you know, chat GPT transactions being run on their cloud. So, you know, that's a that's a huge benefit for them. Amazon doesn't have that option, frankly, because they don't have a chat GPT like, you know, application that's running. A lot of what they're doing is on the enterprise side. And those applications are currently in the build phase, which means over the next several years, we should see the trickle down effect of those usage, you know, driving up AWS.

6:33So I think there is a timing mismatch. I don't see, you know, them as being inferior in any way to some of the other cloud providers. In fact, as I said, they are the largest with probably the most services out there right now. Do they stay the largest? I mean, they certainly were early into this. I think you could say that they helped invent this. I mean, Andy Jassy, certainly that's why he's CEO after heading up the Amazon Web Services and then being picked by Bezos to take this job. Would you say that they are comfortably in first or is Azure at Microsoft on Urag and also is Google Cloud doing a good job of catching up?

7:12They are both doing a very good job of catching up. And as I said, you know, Microsoft has an inherent advantage there. So maybe down the road, several years from now, let's say three to four years, they would be neck to neck. But one of the things is this is a market where we think the entire market is growing much bigger. We don't see five years from now AWS being a smaller business than where it is right now. The rate of growth depends on the propensity of enterprises to spend on technology. But we think all three of them will benefit with cloud becoming much bigger over the next three to five years.

7:43We should point out some more of the statistics on Amazon. Online stores net sales,$61.5 billion, up 11 % year over year. Physical stores net sales, about$5.6 billion, up 7.5 % year over year. Third-party seller services net sales,$40.35 billion. That's up 11 % year over year. Poonam, you know, they also say in some of the commentary or conviction that AI will change every customer experience is starting to play out. So we talked about it a little bit earlier. I mean, what they are doing in terms of getting people to spend more time on the platform, spend more time on the platform, it's all happening?

8:22Yeah, it's happening. I mean, all the numbers that you just cited, they outperformed expectations. So whatever they're doing, and they're doing a lot, They're doing it right. We think that Amazon is making the right moves to expand their retail footprint online. Once again, you know, it comes back to what do customers want. They want everything. And Amazon's a marketplace that really sells a lot of different types of goods. And they want the speed. And speed is key here because you can get things same day or next day from Amazon without paying a fee, being a prime member. So that's really key here.

8:53And the numbers in the second quarter were actually quite impressive on the retail side. They did do really well. Prime Day sounds like it was a great success. We'll hear more on the call, but the numbers outperformed on the retail side. Is there a read, a follow through, if you will, when it comes to what this tells you about kind of consumers and the U.S. economy? Yeah, I think consumers are focused on value and I think Amazon does give you value. They are trying to keep prices low. And this may be a function of that where, you know, as consumers shop around and they're seeing price hikes due to tariffs, either they've already started or they're coming up, they're finding deals on Amazon.

9:32So they're going there. And that's a nice place for Amazon to be as we move forward into the second half. I want to ask both of you, and let me start with you, Poonam. I mean, what are you thinking about that you want to listen for on the call that the company does with analysts and investors, top of mind, or what you would be asking? Yeah, for me on the retail side, it's really the tariff question and the de minimis question. You know, we know we're losing the de minimis exemption. So how should we think about that in terms of their third party, especially where they do rely on some of those drop shipping, especially haul?

10:04And then the second thing I'm looking for is just how they're going to be pricing the goods as we move into the second half. Because for now, we have been somewhat insulated with a 10 % pause on most goods outside of China. But that we know is changing in the back half. Hey, Anurag, come on back in here, because one thing that we're, I'm looking at the write-ups right now and it does seem like, you know, what we said at the beginning that this operating profit estimate for the current quarter really underwhelmed. Why is it that Amazon doesn't get rewarded for being less profitable the same way that other companies are rewarded for this?

10:43Or maybe the better way to ask it would be, you know, the measure of CapEx and why, you know, investors are so okay with meta platforms spending so much money, but Amazon's operating profit not coming in as high as they thought it would. Is it because meta is just printing money and has a higher margin business? I mean, you have to remember, you know, Amazon has a lot of retail footprint also. So you can't really equate them to a tech company as is. I mean, it's only the AWS part of it. But frankly speaking, if you go back to the history of Amazon for probably 10, 15 years, you know, they did what extremely unprofitable and people, you know, still rewarded for them.

11:21You know, in our view, profitability story has been amazing over the last three to four years. Look at where AWS has gone from low 20s to the 30s. Now, today, it was a bit lower than what consensus were anticipating. But, you know, it ebbs and flows because of the capex that they are investing in throughout their ecosystem. Imagine a business, I mean, last quarter, their AWS profit or our operating margins were 39.5%. I mean, that's a 40 % margin business. That's pretty impressive across any tech platform. So again, it is lumpy, but that's because of investments. That's because of how they hire.

11:56We think longer term, that is still a 40 % margin business. So I want to put the same question I asked of Poonam Anurag, what you are thinking that you want to know a little bit more about when the company gets on the calls with analysts and investors. Yeah, the two things that we want to know is what's happening to your CapEx. Now, my gut feel is they will want to take the CapEx up because all the other cloud providers have done it. So they can't really be left behind. But then the second question is, well, can you give me an idea for all the CapEx that's going in? What kind of AI workloads are you seeing?

12:26And if you are seeing some AI workloads, you know, why not disclose that number and, you know, talk about it openly as Microsoft has done in the past, you know, one and a half to two years. Hey, Poonam Goyal, I want to bring you back in here because you cover e-commerce and athleisure. Carol asked you a really good question about if we can get any insight into the consumer and the health of the consumer by reading into these numbers. Would you say that Amazon is well positioned if you indeed believe that we could be entering a downturn? We did see this question asked yesterday at the Federal Reserve by one of our own reporters referencing that Vantage score report that high-income consumers are actually missing on their bills right now when it comes to autos and credit cards.

13:10Is Amazon well-positioned to be a player if we do see a downturn? I think if we see a downturn, Amazon's not going to escape the ramifications of that. But that said, compared to everyone else in retail, I do think Amazon will fare better than the rest. And I do think that they will continue to attract the value customer who's just looking for deals and looking for value. Because at the end of the day, when you think about how retailers buy, those with scale have buying power. And Amazon has over$700 billion in GMB based on our estimates. I can't think of a retailer bigger than that in the U.S.

13:45that has buying power. All right. Putnam, we're going to let you go. Poonam Goyal, senior analyst for e-commerce and athleisure. We're going to be watching out for her research and commentary also following the company call. She is, of course, with our Bloomberg Intelligence. Anurag, before you go, at least for this moment, Apple should be crossing in less than 10 minutes' time. What will you be looking out for here? We really want to know what commentary they have around AI initiatives and what is the policy at this point in terms of adding other third-party models onto the ecosystem. When we look at the results.

14:18We think we're going to get a push or a pull forward of demand from, you know, the last for the last quarter. But next quarter guidance is extremely important, which we don't think is going to be that great. I feel like we keep saying we want to know more about AI. What are you doing? What are you doing? Anurag Rana, thank you so much. Senior tech analyst at Bloomberg Intelligence there in our Chicago bureau. Quick one before you jump back in. You're listening for ways to help teams move faster, make sharper decisions and turn scattered context into work they can use. ChatGPT for Business can help.

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15:37And hopefully make you see the world anew. Radio Lab, adventures on the edge of what we think we know. Wherever you get your podcasts. You're listening to the Bloomberg Business Week Daily Podcast. Catch us live weekday afternoons from 2 to 5 Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business App. Or watch us live on YouTube. I want to bring in Ivan Feinseth, Research Director and Chief Investment Officer at Tigris Financial Partners. The firm has more than$500 million in assets under management. They've got both Apple and Amazon stock for clients. He joins us from New York City.

16:12What do you make of this? It was a pretty massive beat on the top line, really a massive beat across every category. Slight beat when it came to China. iPad revenue slightly below expectations. What are your first impressions? Well, I think there was a lot of caution going into the quarter, and they were strong on revenue, definitely strong on iPhones, and strong on iPhone sales in China. Those were the key concerns. I think that even Tim Cook just commented that pull forward sales based on tariffs were only a small part from what they were seeing. So then why do you think the iPhone beat was so big?

16:49It just could be where we are in the upgrade cycle. But we're in a time where people hold onto their phones for longer and wait to buy it because that new one comes out traditionally in September, late September. There's still a lot of, you know, 12s out there. So people may, you know, can't maybe hold off or the promotion. We're still seeing a lot of promotions from the carrier providers like AT &T, T-Mobile and Verizon. So the promotions drive sales. Maybe it is, like Sarah said, concerns over higher tariff driven prices and people are upgrading now. So either way, there was a lot of concern that it could have been a weaker than expected quarter, and it was a much stronger than expected quarter, especially in three key areas, overall revenue, iPhone sales and China iPhone sales.

17:44All right. So you've got Tim Cook saying today, Apple is proud to report a due quarter revenue record with double digit growth in iPhone, Mac and services and growth around the world in every geographic segment. segment. So highlighting that, you know, the big question that we had, Ivan, they're going into it. And one of the things that was top of mind is AI, right? In a week, in a couple of weeks where we've been looking at the hyperscalers, the big spend, the return on investment as a result of that. What about on AI? How big a deal is that for you when you look at Apple? It is a big deal. and they still really have not like wowed on AI yet.

18:25And, you know, they're talking about partnering, you know, working with other AI providers. I mean, Siri still needs a lot of improvement. A lot of the functionality that is out there is pretty good as far as pictures and text and email messages to integrate AI to help facilitate the, you know, editing of pictures and sending texts and emails. But I think they still have a long way to go because Apple has always had a tremendous wow factor. And AI has really not been at the level that everybody is expecting from Apple. So that is an opportunity. But services revenue did increase nicely, which is another key point.

19:10So those, I think, are really, that's the fourth of the total four key points that everybody was focusing on. Our Ian King sharing with the team on the live blog, service revenue up 13 percent. Wearables provided sales that actually showed a contraction of about 8.6 percent. Max sales, an increase of 15 percent. I've had revenue, a decline of 8 percent. And iPhone had revenue, an increase of 13 percent. AI, why is it so tricky for Apple? They're continuing to lose some top talent. Why is it so tricky for them, Ivan, that they can't seem to get it together? Maybe the conundrum because Apple is viewed as an incredibly innovative company.

19:52And while they're never the first mover, they didn't invent the smartphone, but they took it to the next level. They didn't invent the iPod, took it to the next level. So each thing that they address, they take it. They're not the first mover, but they do take it to the next level. So everybody has high expectations as far as Apple intelligence or AI. So I think that is part of it. and they really haven't come out and wowed everybody. The other area that I think is important, well, I think the Vision Pro as a concept was really great, but I didn't think they were going to sell that many of those headsets at$3 ,400.

20:30And I expected at some point they would come out with a more streamlined version, a much more cost-competitive version. And I also am a big believer in the smart glass concept that Meta is doing very well with. And I think we will see some type of smart glass concept from Apple that integrates across all of its devices as far as the phone and the watch where you could keep the phone in your pocket and do a lot of things as far as communication, make and receive calls, send video and pictures in real time and communicate just like you would on FaceTime through a pair of Apple smart glasses. I already talk to myself with my phone all the time.

21:14I can just talk to myself wearing glasses. That's totally fine. Certainly, you're right, Ivan. The form factor for the Vision Pro, much different than Meta's Ray-Ban sunglasses. Hey, our own Mark Gurman repeatedly saying essentially this, and I'll read it right from the live blog. This is nothing new to our audience because Mark says it all the time. He writes, as I've been saying, despite concerns about the performance of Tim Cook from some analysts, there is no universe in which the board will replace him. With this type of quarter, it's essentially impossible. Do you agree with Mark's assessment there, Ivan, that Tim Cook is there to stay despite the challenges that the company's experienced when it comes to AI?

21:56He has done a phenomenal job. He's created tremendous shareholder value and returns since his tenure as the CEO. Companies hit bumps. Apple has innovated tremendously under his time as CEO. So he's done a great job. And I don't think any of the issues that are concerns right now are really being, could be tied to some kind of fault of his. So I think it's highly unlikely that they will replace him. And I think that Apple will come back strong in AI. And I think we will see the next generation of some kind of AR, VR headset moving more toward the glasses type of form factor. of which, look, they have a billion and a half iPhone users.

22:50They have over two billion ecosystem of Apple product users that are eager to adopt Apple products and buy Apple products. The integration across their products is tremendous. And they just enhanced that further with the recent announcement of the Glass operating system that standardizes the interaction of all the devices. Hey, just one last question. As we see, Apple shares up about 2 % here in the aftermarket. Anything that makes you want to buy Apple shares here? We have a buy on it. We got a$220 price target. We're probably going to reevaluate and raise it. And I think on any weakness, it has been a buy.

23:38And I think that there will surprise on the positive for AI. And the services revenue also is a tremendous driver of growth and profitability. And that will continue as well. All right. Good stuff. Ivan, thank you so much. Ivan Feinseth. He is Research Director, Chief Investment Officer of Tigris Financial Partners. They've got over$500 million in assets under management joining us here in New York City. Again, watching Apple shares higher in the post market after they reported earnings and some strong numbers outperformance their stock up 2%. This is the Bloomberg Business Week Daily podcast.

24:19Listen live each weekday starting at 2 p.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. You can also listen live on Amazon Alexa from our flagship New York station. Just say Alexa, play Bloomberg 1130. The Fed, the trade, the markets, tariffs, everything that we are keeping a watch on on this Thursday. Even though it feels like a Friday, it is still Thursday. In particular, we want to dig a little bit into what we've seen in the dollar and the FX trade. J.T. Bardwaj is with us. She's director in FX Strategy for 2G Securities back here in our studio. Good to have you here.

24:53A lot coming at investors. We've seen some strength as of late in the U.S. dollar. Let's go back to the macro. What's of note, especially in a week where we've heard from the Fed, got a decision, we have the White House still doing trade deals and tariff deals. There's some extensions. We're trying to figure it out. What's the important macro trade right now for the U.S. dollar? Thank you so much for having me. Always a pleasure to join both of you in the studio. I think what we have learned from this week is that, you know, there is still a lot of uncertainty, even with the trade deals being announced, particularly on the data side.