Amazon (AMZN) posted a superb Q2 on paper, but the market was mostly unfazed.
Shares pulled back sharply, with investors fixating on Amazon Web Services (AWS) relatively lagging in growth.
However, in that cloud of concern (no pun intended), JPMorgan sees an opening, not noise.
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Veteran Analyst Doug Anmuth’s call effectively cuts through the volatility, while putting fresh focus on how Wall Street’s top desks are interpreting Amazon’s long-term AI and infrastructure story.
Image source: Noah Berger/Getty Images for Amazon Web Services
Amazon’s big AI bet tests investor patience
Amazon’s Q2 results showed a clear contrast in booming top-line expansion, massive investment on one side, and investor unease on the other.
Overall sales jumped a superb 13% amounting to $167.7 billion, beating estimates by an eye-popping $5.60 billion.
Related: Veteran analyst spots unexpected star in Apple’s earnings report
Similarly, net income surged, with a $1.68 EPS, blowing past estimates by 36 cents.
However, all eyes were on AWS sales, which were relatively uninspiring.
AWS sales grew 17.5% to $30.9 billion, but remarkably lagged the headline-grabbing growth at competitors.
Putting things in perspective, Microsoft Azure posted a 39% jump, while Google Cloud surged 32%, reinforcing fears that AWS may be losing ground in the AI cloud race.
Margins told a similar story.
AWS operating margin fell sharply to 32.9%, down from 39.5% the prior quarter. Management attributed the squeeze to its aggressive GenAI investments and infrastructure hiccups, particularly with power, chip supply, and server yields.
What turned heads, though, was the spending.
Amazon’s capital expenditures came in at a record $31.4 billion, up close to 90% year-over-year.
That’s a remarkably high number, especially with management calling it “reasonably representative” of what’s to come in the back half of the year.
However, the goal at this point is clear, and it involves scaling AWS’s infrastructure quick enough to support AI ambitions and relieve capacity strain.
Wall Street wasn’t sold, with concerns centering around AWS’s slower growth, thinner margins, and unclear near-term return on the hefty capex.
Still, CEO Andy Jassy defended the strategy.
He emphasized that Amazon is still in the early innings of its powerful multi-year AI journey and that capacity constraints will ease as new infrastructure comes online.
JPMorgan’s three-word response on Amazon stock: Buy the pullback
As previously mentioned, Amazon may have delivered on paper, but the market didn’t see it that way.
Amazon stock tanked over 8% on Aug. 1, but it clawed back some of those losses pre-market Aug. 4. Still, the initial drop raises some major questions.
Nevertheless, one top voice on the Street isn’t shaken.
Related: Morgan Stanley slaps eye-popping price target on Nvidia stock
Top-rated analyst Doug Anmuth at JPMorgan feels the dip is exactly when investors should move in.
He feels investors should “Buy the pullback,” backing up his Buy rating on Amazon stock, while boosting his price target from $255 to $265, implying a superb upside of 23% from current levels.
So what triggered the drop?
According to Anmuth, the culprit was AWS. While AWS revenue jumped 17.5% year-over-year to $30.9 billion, it underwhelmed investors who expected more, especially considering the backdrop of AI-fueled cloud expansion.
That’s not all. Amazon also reported a record $31.4 billion in capex, which only made matters worse in compounding the pressure on AWS to deliver even bigger growth numbers.
Still, the Street isn’t backing off.
Analysts at Citi also bumped their price target on the stock to $270, noting Amazon’s higher spending reflects healthy demand and efforts to fix infrastructure constraints in the cloud.
However, it’s important to consider that growth lagged peers, and management didn’t exactly calm concerns around the AI opportunity.
Despite that, the Wall Street punditry believes the selloff doesn’t match the broader story. And for JPMorgan, this is the kind of dip worth loading up on.
AWS: Amazon’s profit engine and AI powerhouse
AWS is far from purely a segment; it’s arguably the profit core and strategic anchor for the entire business.
It’s responsible for close to 60% of Amazon’s operating income, with AWS running at an annualized sales pace above $123 billion.
That scale gives it the profile of a standalone cloud giant, one that underpins the bulk of Amazon’s enterprise value.
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CEO Andy Jassy has reiterated AWS’s incredible competitive moat, noting it’s still “meaningfully larger” than its next-closest rival.
Recent data supports that lead.
Per the most recent reports, AWS commands roughly 31% to 32% of the global cloud infrastructure market, followed closely by Microsoft Azure with roughly 22.5% to 24%, and Google Cloud at 10% to 12%.
Other estimates tend to vary based on methodology, but generally confirm AWS’s position at the top, with competitors trailing by a hefty margin.
AI is rapidly deepening that role.
AWS is investing a ton of money in generative and agentic AI, in serving external clients through the Generative AI Innovation Center.
Another key differentiator for AWS is that it effectively originates from Amazon’s internal infrastructure needs before commercialization.
It comes with embedded efficiency and noteworthy cash-flow sustainability, making it more than a cost center, powering internal tools like Amazon Personalize.
That synergy creates a robust loop where AI sharpens retail engagement and fuels more demand for compute.
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Margins may have compressed recently on the back of AWS building its custom infrastructure, including Trainium chips, but those bets are about long-term dominance.
