Amazon Falls 7% on AWS Growth Concerns, But Analysts Remain Upbeat

TradingKey - In post-market trading on Thursday, Amazon (AMZN.US) reported second-quarter revenue and profit that exceeded expectations. However, Amazon Web Services (AWS) revenue only slightly surpassed forecasts, and mixed third-quarter guidance led to a 7% drop in its shares after hours. 

AWS, the world's leading cloud service provider, saw its Q2 sales rise by over 17% to $30.9 billion, just above the average analyst estimate of $30.8 billion. Nonetheless, the slowing growth rate has raised concerns about Amazon potentially losing its industry leadership position. 

Furthermore, the outstanding cloud business performance reported by competitors Microsoft and Google heightened expectations for AWS and fueled market apprehension.

Despite these concerns, numerous analysts remain optimistic about Amazon's future prospects following the earnings announcement. 

Goldman Sachs expressed confidence in Amazon's continued ability to achieve solid compound revenue growth and operating profit expansion over the years, supported by its robust performance in e-commerce and advertising, as well as its ongoing investments in long-term growth initiatives.

Amid pressures faced by U.S. retailers due to tariffs, Amazon's focus on low prices, fast delivery, and a vast range of products solidifies its position as the top e-commerce retailer, providing it with a competitive edge.

Even in what might seem like a disappointing performance by AWS, Amazon hasn't exactly "failed." CNBC's analyst Jeff Marks noted that while the operating profit guidance fell short of expectations, Amazon's management is known for providing broad guidance ranges and subsequently exceeding initial expectations.

Independent research provider CFRA echoed this sentiment, pointing out that Amazon's earnings in recent quarters have consistently surpassed their bottom line forecasts.

Another factor bolstering analyst confidence in Amazon is AWS's stable and predictable order volume. According to Ritholtz Wealth Management, AWS had approximately $189 billion in remaining performance obligations as of Q1, with a weighted average remaining contract term of 4.1 years, indicating strong predictable income for years to come. The growth rate of backlog orders has already outpaced current revenue growth, suggesting that customers are committing to more long-term contracts.

Additionally, Amazon disclosed plans to increase capacity in the latter half of the year to address the rapid growth in AI workloads, which its existing infrastructure cannot fully support, potentially generating additional revenue.

Many analysts have raised Amazon's target prices: TD Cowen increased from $250 to $255, JPMorgan from $255 to $265, Pivotal Research from $260 to $285, and Goldman Sachs from $220 to $240. Some analysts recommend that since Amazon's post-market performance nearly erased all gains for the year, this presents a prime buying opportunity.