Amazon (AMZN +15.32%) just delivered one of the best quarters in recent history. It posted results much better than any analyst expected, and the stock popped the day following earnings. There's one division in particular that was noteworthy, and it's the Amazon segment most exposed to AI: Amazon Web Services (AWS).
AWS blew expectations out of the water, and there could be more where that came from in future quarters.
Image source: The Motley Fool.
AWS is the primary reason to invest in Amazon
While most investors recognize Amazon from its dominance in the commerce industry, I think there are far more compelling reasons to invest in Amazon stock. Namely, its AWS cloud computing service. During Q2, AWS delivered sales growth of 37%, crushing Wall Street's expectation of 31% growth. This is a big deal because AWS actually generates the majority of Amazon's profits.
NASDAQ: AMZN
Key Data Points
In Q2, AWS generated $16.6 billion in operating income. That's about 60% of Amazon's total, so just because AWS has only a 21% revenue share doesn't mean it's a small part of Amazon's business. However, this quarter's rapid growth rate is just the beginning.
Amazon is spending a lot of money on capital expenditures this year, $220 billion to be exact, and nearly all of that money is going to build and equip data centers. This will increase the available computing power that Amazon can rent out to clients, allowing revenue to expand. So, investors need to realize that this is the new paradigm, and that AWS and Amazon as a whole will likely produce incredible growth for the foreseeable future, especially if AI demand continues to ramp up.
Companywide, Amazon's 20% revenue growth rate is one of the best it has posted since the COVID-19 era.
AMZN Revenue (Quarterly YoY Growth) data by YCharts
As alluded to above, this will likely continue to accelerate for the foreseeable future, as AI spending isn't expected to slow down anytime soon. I think all of this indicates that Amazon is a great investment over the next few years, as AWS' growth will substantially boost Amazon's profit and growth profile.
Amazon should outperform the broader market and deliver investors the market-beating returns they desire. Even though Amazon's stock soared following the results, I wouldn't be surprised to see this strength continue for a while, as few investors realized that a huge quarter like this was even possible from Amazon.
