Analysis: AMZN

Shares of  Action Alerts PLUS holding Amazon (AMZN)  are moving higher Friday after the company reported earnings Thursday evening. The company posted a far better-than feared June-quarter report, which, in our view, was better than expected given the timing difference between Prime Day this year and last year.

The company topped its operating income guidance for the quarter with revenue at its North America and International Segment rising in the low-double digits while Amazon Web Service (AWS) revenue soared 33% year over year with several basis points of margin improvement vs. the year-earlier quarter. The company's Advertising Services segment revenue increased 18%, year over year, to $8.8 billion.

For the current quarter, Amazon sees revenue of $125 billion-$130 billion vs. the $126 billion consensus, and operating income of $0-3.5 billion, which is once again below consensus expectations. Arguably supporting that guidance, Amazon shared inflationary pressures, including higher fuel, trucking, air and ocean shipping rates. These remained at elevated levels during the June quarter, on par with those in the March quarter, and it expects those pressures to continue in the current quarter. In our view, Amazon could be overselling the impact of those inflation pressures given the decline in gas prices and shipping rates vs. their mid-June levels.

On the top line, Amazon's $125-$130 billion guidance, which is up ~15% at the midpoint, could also prove to be somewhat conservative, in our view, considering the quarter's inclusion of Prime Day 2022. Being consistent with our other comments this week, the crux for Amazon won't be its AWS business, which we continue to see growing as public and private cloud adoption continues, but rather its digital retail business and to a lesser extent its advertising one. While Amazon is poised to continue to benefit from the resurgence in digital shopping as consumers look to combat inflation and stretch their disposable spending dollars, there is concern for overall spending dollars amid a rising interest rate environment, continued inflation pressures and rising consumer debt levels.

We will keep our Two rating intact for now as well as our $175 price target. As we move through August and complete the Back to School spending season, we'll look to monthly retail sales data with an eye to revisit both.