4 Eye-Popping Numbers From Amazon's Stellar Quarter

Amazon's stock skyrocketed more than 10% on Friday following its Thursday earnings report, a welcome reprieve for shareholders who have endured two years of subpar returns.

Investors can hope that the current bounce may be the start of something more significant for the tech conglomerate. Looking under the hood at some key performance metrics, an even rosier picture is emerging off rock-bottom expectations, suggesting this upturn could have a way to run.

AWS: 33% and 65% growth

Even though Amazon's e-commerce business gets the lion's share of the discussion, Amazon Web Services (AWS) is most likely Amazon's most valuable segment, and it may not be close. That's why I always check the AWS figures first in Amazon's earnings reports.

While some have feared cloud computing could slow down amid a broader economic turmoil, there doesn't seem to be any letup in AWS's trajectory. Revenue surged 33%, even though it was lapping strong comps from the prior-year quarter. Operating margin was 29%, significantly down from last quarter's 35.3%; however, the second quarter always sees higher expenses for AWS because of the vesting of employee stock compensation every year. Compared with the year-ago quarter, operating margin actually expanded by 0.7 percentage points.

Management also highlighted that it was investing heavily in AWS, putting pressure on near-term margins. But that's a just another sign of confidence in AWS's long-term growth prospects. On that note, management noted the AWS backlog increased by a whopping 65%, nearly double the rate of revenue growth, with more customers committing to longer contracts. 

Shipping cost losses narrowed to 8%

As promised last quarter, Amazon has begun to get a handle on the overcapacity built during the pandemic. Employee headcount was down about 100,000, with temporary workers for the e-commerce segment rolling off from high seasonal and omicron-related hiring binge. Amazon identified $6 billion in excess costs last quarter, and it had already corrected some $1.5 billion of excess overcapacity costs by the end of Q2, with the bulk of that coming from headcount reductions in its fulfillment network.

Amazon has also been subleasing excess warehouse space, and said it would continue to benefit as it grows into its capacity. Management also said on the call with analysts that it was improving delivery efficiency and density.

While it's difficult to parse how profitable the e-commerce business is due to continuous investments, one way to track Amazon's efficiency is to track shipping costs versus items delivered. Shipping cost growth usually exceeds items delivered, but the difference between these two metrics can tell investors how Amazon's efficiency is tracking. As you can see, that's headed back in the right direction.

Data source: Amazon Q2 earnings report. Chart by author. YOY= year-over-year.

With the exception of the high-traffic fourth quarter 2021, the gap narrowed quite a bit relative to the recent past, perhaps owing to Amazon's success in reining in costs and improving delivery efficiency.

Digital advertising: 18% growth crushing rivals

Amazon's advertising revenues came in at 18% growth -- really impressive in a quarter that saw a broad pullback in digital ad spending. By comparison, here's how other large-cap digital advertisers fared last quarter (these numbers show only the digital ad portion of the respective company):

Data sources: company Q2 earnings releases.

Amazon's digital ad business outgrew all large-cap peers in a difficult advertising market, except for Roku, which is less than one-tenth the size.

That's probably because Amazon's ads are very close to the point of purchase, which could therefore make its ads more efficient than other general brand advertising. Google's Search benefits from this as well, as customers express their intent by what they search for.

Amazon also gets a fair amount of advertising from connected TV through Prime and the Fire Stick business, and connected TV also seems to be outperforming social media, as Roku's growth shows.

Other revenue: up 131%

Given how large Amazon is, not many people pay attention to its "other revenue" category. That may also be true because the company doesn't disclose what's in it. However, the other revenue category actually saw an eye-opening jump in revenue last quarter, up 131% and exceeding $1 billion, which is certainly nothing to sneeze at.

One possibility could be if Amazon's "Just Walk Out" technology for third party stores were in that category. Amid the reopening, Amazon has installed "Just Walk Out" tech at more and more third party locations, including the Nashville airport and T-Mobile Park in Seattle. So, if that were the case, it would make sense.

In any case, investors may want to pay attention to the "other" category to see if last quarter's revenue jump was a one-off or the start of something bigger. Remember, AWS was once a moonshot start-up project, so the seeds of Amazon's next big business could lie here.