On Thursday afternoon, e-commerce giant Amazon.com, (AMZN -1.51%) posted yet another quarter of strong revenue growth juxtaposed against relatively weak profitability. This has become a recurrent theme in recent years, as Amazon has invested heavily in growth initiatives.
For many investors, Amazon's growth now/profit later strategy is extremely unappealing. But for its shareholders, Amazon.com has been a huge winner -- and these investors are more excited than ever about Amazon after its Q2 results.
Amazon's quarter, by the numbers
Amazon.com blew away both its own guidance, as well as analysts' expectations with its Q2 performance. Q2 revenue rose 20% year over year, to $23.2 billion. In its April guidance, Amazon had projected that revenue would grow 7%-18%, with the high-end of its guidance range set at $22.8 billion. Meanwhile, analysts were looking for revenue of $22.4 billion.
This level of revenue growth was especially impressive given that Amazon faced a $1.4 billion revenue headwind from the strong dollar during the quarter. Without this currency impact, revenue growth would have reached 27%. By comparison, Amazon's Q1 revenue rose 15% year over year, or 22% excluding currency.
Amazon also crushed expectations in terms of profitability. The high-end of its guidance called for operating income of $50 million. This guidance figure is usually fairly conservative, but for Q2, it wasn't even in the ballpark, as operating income reached $464 million.
Earnings per share of $0.19 were modest, but still much better than the $0.27 per share loss recorded in Q2 2014. This earnings performance far surpassed expectations, as analysts were expecting a loss of $0.14 per share.
At a segment level, the North America segment remained solidly profitable while Amazon continues to lose money in its international markets. But the star of the show was its Amazon Web Services cloud-computing unit.
Investors were extremely impressed when AWS posted a 16.9% segment margin in Q1. Thus, you can imagine how impressed they were that the AWS segment margin expanded to 21.4% in Q2. The unit also continues to grow rapidly, with AWS revenue surging 81.5% year over year.
Amazon expects to maintain or even increase its elevated growth rate this quarter. The company's guidance calls for Q3 revenue growth of 13%-24%.
While the top of Amazon's operating income guidance range is $70 million -- and the bottom is a loss of $480 million -- the company typically gives conservative guidance for that metric. This implies that Amazon will see a big improvement over the $544 million operating loss posted in Q3 2014. It also means that Amazon's EPS is likely to be much better than the $0.61 per share loss that analysts are currently estimating.
Amazon bulls rejoice
Given the blowout result and equally strong guidance, it's not surprising that Amazon bulls are rejoicing and sending the stock higher. In fact, Amazon.com stock jumped about 18% in after-hours trading as of 5 p.m. That put it a country mile ahead of its previous all-time high. If the gains hold, Amazon's market cap will surge past $250 billion.
Amazon.com is still far from being a consistent profit machine, to be sure. Even with earnings coming in far above expectations, Amazon still earned less than $0.016 in pre-tax profit for every $1 in revenue it produced. Including taxes, Amazon's profit margin was a fraction of 1%.
Nevertheless, the company's accelerating revenue growth shows that its strategy of investing heavily in multiple areas to drive growth is paying off. Meanwhile, the fact that it earned any profit at all gives investors hope that Amazon will be able to drive further margin expansion in the coming years in order to serve up substantial profits for its shareholders.