Instant Reaction: Amazon Falls After Earnings, Cloud Growth Spooks Investors

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2:38That was in line with estimates that are at 19.42 billion. I guess maybe on the lower side, it's not in line. And second quarter operating income, though, blew past estimates at 19.17 billion dollars. 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 Anarag Rana and Senior Analyst for e-commerce and athleisure, Poonam Goyal.

3:11Anarag out there in our Chicago Bureau, and we've got Poonam in our Princeton Bureau. Hey, Anurag, 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 percent 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?

3:44And I think we look forward to hearing what management has to say about it. I 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?

4:18Yeah, absolutely. You know, AI is a big deal in e-commerce. And Amazon's been investing a lot to improve the customer experience. It 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, you know, 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, etc.

4:51So 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? So 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.

5:22So 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. Let's remind everybody that in the aftermarket following earnings, Amazon down about 2.6 % here. It's only up about 7 % year to date. 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.

5:58Why 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. So, you know, that's one factor. And, 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 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.

6:34A 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 driving up AWS. So I think there is a timing mismatch. I don't see 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.

7:15Would you say that they're comfortably in first or is Azure at Microsoft on Urag and also is Google Cloud doing a good job of catching up? They're 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, you know, several years from now, let's say three to four years, they would be neck to neck. But, you know, one of the things is this is a market where we think the entire market is growing much bigger. You know, we don't see five years from now 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.

7:50But we think all three of them will benefit with cloud becoming much bigger over the next three to five years. We should point out some more of the statistics on Amazon. Online stores net sales, 61.5 billion, up 11 percent year over year. Physical stores net sales, about 5.6 billion, up 7.5 percent 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?

8:35Yeah, 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.

9:06And 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.

9:45So 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.

10:17And 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 percent 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 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?

10:56Or 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 were extremely unprofitable and people, you know, still rewarded for them.

11:35You 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 operating margins were 39.5 percent. I mean, that's a 40 percent margin business. That's pretty impressive across any, you know, tech platform. So, again, it is lumpy, but that's because of investments. That's because of how they hire.

12:10You know, we think longer term that is still a 40 percent 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?

12:40And if you are seeing some AI workloads, why not disclose that number and talk about it openly as Microsoft has done in the past 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? And we did see this question asked yesterday at the Federal Reserve by one of our own reporters referencing that VantageScore report that high-income consumers are actually missing on their bills right now when it comes to autos and credit cards.

13:24Is 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.

14:01that has buying power. All right, Poonam, 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 Rana, thank you so much. Senior Tech Analyst at Bloomberg Intelligence there in our Chicago Bureau. I do want to point out, though, Amazon, the big one right now. We've just talked about the company, but projecting profit for the third quarter that is underwhelming on the expense that it has been doing when it comes to artificial intelligence.

14:32The race is for AI, and it looks like some companies take Meta, take Microsoft, take Alphabet. Investors are impressed, but not necessarily the case here with Amazon.

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