Amazon stock jumps 12% as sales beat and AWS growth overcome a second straight quarterly loss

Analysts on average expected Amazon to post earnings of 12 cents a share on sales of $119 billion, according to FactSet, after executives reported a surprising loss and a weaker-than-expected forecast three months ago and said they would cut costs. At that time, executives said that they had faced $6 billion in extra costs during the first quarter, with $2 billion as a result of declining productivity, and expected $4 billion in such costs in the second quarter as the cuts began.

“Despite continued inflationary pressures in fuel, energy and transportation costs, we’re making progress on the more controllable costs we referenced last quarter, particularly improving the productivity of our fulfillment network,” Chief Executive Andy Jassy said in a statement included with the results Thursday, adding that “We’re also seeing revenue accelerate.” 

Amazon shares jumped more than 12% in after-hours trading immediately following the release of the results. The stock has been pressured since Amazon reported its first quarterly loss in seven years, falling 16% in the past three months as the S&P 500 index SPX, +1.21% declined 6.2%.

E-commerce dropped off as the world entered year three of the COVID-19 pandemic, as evidenced by Amazon’s struggles to support its massive growth and Shopify Inc.’s SHOP, +1.90% recent layoffs and disappointing financial performance. Amazon reported a second-quarter operating loss of $2.4 billion in its e-commerce business, on net sales of $101.5 billion, after posting an operating profit of $3.51 billion on net sales of $98.27 billion a year ago. Analysts on average expected an operating loss of $3.58 billion on sales of $100.18 billion, according to FactSet.

Amazon has long relied on its Amazon Web Services cloud-computing service to make up for the thin-to-negative margins on its e-commerce business, but there were concerns that cloud-computing growth could slow down, as other tech businesses that rely on the service see pullbacks and cost cuts. Oppenheimer analysts projected that Amazon will look to cut prices on AWS as well.

For more: ‘People will freak out’ — The cloud boom is coming back to Earth, and that could be scary for tech stocks

“We view engagement trends in social media and streaming as revenue headwinds for AWS’s usage-based pricing model (Netflix NFLX, -0.32%, Snap SNAP, +1.26%, Spotify SPOT, -1.73%, Pinterest PINS, +0.52%, and Meta META, -5.22%, among the top 20 customers at AWS, in our opinion). Plus, softness in VC funding to startups likely finds its way to AWS softness in 2H22 (we estimate tech startups make up 10% of AWS revs),” the analysts wrote earlier this week, while bringing down their price target on the stock to $160 from $175 but maintaining an outperform rating. “Finally, AWS hasn’t had price cuts in the past couple of years. Our industry conversations hint at a price cut expectation in 2H22.”

AWS kept growing and producing strong profit in the second quarter. AWS produced operating income of $5.72 billion on revenue of $19.74 billion, up from operating profit of $4.19 billion on revenue of $14.81 billion a year ago, for a revenue growth rate of 33.3%. Analysts on average expected AWS operating income of $6.04 billion on net sales of $19.56 billion.

“AWS continues to grow at a fast pace and we believe we are still in the early stages of enterprise and public-sector adoption of the cloud,” Chief Financial Officer Brian Olsavsky said in a conference call Thursday.

Advertising, a business that has been growing healthily for Amazon in recent years, recorded $8.76 billion in revenue, up from $7.45 billion a year ago. Amazon began breaking out its advertising business earlier this year, and analysts expected it to produce sales of $8.65 billion in the quarter.

For the third quarter — which will include sales from Prime Day earlier this month, an event that Amazon said established record sales — executives guided for revenue of $125 billion to $130 billion and operating income of break-even to $3.5 billion. Analysts on average were forecasting operating income of $4.39 billion on revenue of $126.49 billion, according to FactSet.

Amazon’s cost cuts showed up in its employment total — Amazon reported a workforce of 1.523 million workers as of the end of the second quarter, down from 1.622 million at the end of the first quarter. That is the most substantial quarterly decline in Amazon’s workforce in records dating back to the beginning of 2018, and only the third sequential decline in that time, with the other two smaller percentage declines taking place between the fourth and first quarters, after the holiday rush.

“We have also moved quickly to adjust our staffing levels and improve the efficiency of our expanded operations network,” Olsavsky said. “We have slowed our 2022 and 2023 operations expansion plans to better align with expected customer demand. While there is still work to be done, we made good progress in Q2.”

Amazon’s operating expenses grew 11.9% year-over-year, down from 13.2% growth in the first quarter.