What Amazon’s Latest Earnings Mean for Long-Term Investors todayheadline

Earnings season is in full swing, and some of the most closely watched companies have given investors crucial information to chew on. On July 31, Amazon (AMZN -0.23%) reported earnings for the second quarter (ended June 30).

Revenue of $167.7 billion and diluted earnings per share of $1.68 both came in well ahead of consensus analyst estimates. However, it’s important to view this fresh information in the context of Amazon’s bigger picture.

Here’s what this “Magnificent Seven” stock’s latest earnings report means for long-term investors.

Second-quarter highlights

I think it’s appropriate to first give a brief high-level overview of the latest quarter’s most important financial drivers. Revenue increased 13% year over year. The top line was bolstered by an 11% gain in the key North America segment.

Operating income soared 31% to $19.2 billion in the quarter. CEO Andy Jassy has focused relentlessly on cost controls and operational efficiencies in recent years, so it’s very encouraging to see this strategy play out in the form of rising profits.

However, the stock tanked immediately following the news. The market is a forward-looking machine. And investors were not happy with management’s forecast for operating income in the third quarter to be $18 billion at the midpoint. This would translate to just a 3% year-over-year gain, much slower than the recent growth Amazon has put up.

Zoom out and focus on the big picture

Every company’s quarterly results are scrutinized by the investment community, but it’s important to take a step back and look at the bigger picture. Amazon’s latest financial update provided some key insights for long-term investors.

The first takeaway is that the leadership team is intensely focused on the ongoing artificial intelligence (AI) boom. This is evident by looking at its surge in spending. Capital expenditures totaled $31.4 billion in the quarter.

If this pace continues, it translates to more than $125 billion on an annualized basis. These are huge moves meant to expand the company’s technical infrastructure and better serve demand for AI.

Another takeaway is that Amazon is a well-rounded enterprise, which should make it the envy of other companies. Yes, this business is known first and foremost for how it totally disrupted the retail sector. Consequently, e-commerce remains key to its success.

However, the company is in a position to keep benefiting from other powerful secular trends. Cloud computing is one area to watch. Amazon Web Services (AWS) has long been the leader in cloud computing. But its dominant position is being challenged, as rivals exhibit faster growth.

That’s not too surprising because AWS is operating from a much bigger revenue base. The overall industry is rapidly expanding, which means there will be plenty of opportunities for multiple players to be successful. Nonetheless, investors will want to keep a close eye on this segment’s sales growth.

Digital advertising has become a very important piece of the Amazon pie. The business owns valuable digital real estate with its online marketplace and the Prime Video streaming service, which allows it to show ads. This segment grew revenue by 23%. And judging by the profitability of the top digital ad companies out there, Amazon is surely raking in meaningful earnings here.

Long-term investors can also take solace in the fact that this stock remains a smart holding. As of Aug. 6, shares trade at a price-to-earnings ratio of 33.9, significantly below the trailing-five-year average. And it shows that the stock’s valuation is not even close to being stretched. There is still upside for patient investors who can look out five years or more.

Despite the market’s negative reaction to Amazon’s second-quarter results, it’s easy to see that this is still an elite business that deserves a place in your portfolio.