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Why, Inc. Is Soaring Today

By Anders Bylund - Apr 29, 2016 at 12:02PM

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Huge cloud computing profits are turning the online retailer upside down -- in a good way.

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What: Shares of (AMZN 3.94%) are on a roll today, rising 12.5% as of 11:30 a.m. ET. The e-commerce and cloud computing giant reported second-quarter earnings last night, blowing past analyst estimates and management guidance alike.

So what: Amazon's second-quarter net sales rose 28% year over year to land at $29.1 billion. Trailing free cash flows doubled to $6.4 billion, Amazon turned the year-ago quarter's $0.12 adjusted net loss per share into $1.07 of positive earnings per share, and GAAP operating income quadrupled to $1.1 billion.

Wall Street's finest would have settled for adjusted earnings near $0.58 per share on roughly $28 billion in sales. Those turned out to be easy targets.

Management's own revenue guidance for this quarter was in line with the analyst view. As for operating profits, the reported figure was 57% above the top end of Amazon's very wide guidance range.

Looking ahead, revenue guidance for the third quarter pointed to 26% growth, stopping at $29.3 billion. The target range for non-GAAP operating income stretches from $1.2 billion to $1.8 billion. That's not a lowball goal.

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

Now what: Much of Amazon's sudden bottom-line surge comes from the Amazon Web Services segment. That bundle of cloud computing tools saw second-quarter revenues rising 64% year over year, tripling its operating income take. This high-margin, high-growth operating generated 9% of Amazon's overall sales in the quarter, but 56% of the company's operating profits.

Standing on top of the online retail divisions and their solid financial foundation, the cloud computing business has become the little profit engine that could. In a few years, we might think of Amazon as a cloud computing business first and the e-tailing stuff as a curious side project -- assuming that these growth trends continue.

Now, where did I put that old crystal ball again...?

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