Jeff Bezos' Amazon Stock Surged 14% After a Blowout Earnings Beat, Adding $25 Billion to His Fortune. Is the Stock Still a Buy After the Rally?
Key Points
Amazon's Q2 revenue and earnings per share came in well ahead of Wall Street's expectations.
AWS posted a 63% jump in operating income, ending the quarter with an almost $500 billion backlog.
The stock's valuation presents an attractive setup.
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To say that Amazon's (NASDAQ: AMZN) second-quarter financial results were well received would be an understatement. Shares surged 14% just after the news, with the business now sporting a market capitalization that's just under $3 trillion.
Jeff Bezos, who stepped down as CEO in 2021 and has been chairman of the board since, owns more than 8% of the company's outstanding shares. The post-earnings jump immediately added $25 billion to his fortune on the morning of July 31. He's the world's third-richest person, just behind Alphabet co-founder Larry Page.
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Is the "Magnificent Seven" stock still a buy after its huge rally?
Amazon founder Jeff Bezos. Image source: Amazon.
AI demand is the main story
During the three-month period that ended June 30, Amazon reported revenue of $200.6 billion and adjusted earnings per share of $1.97. Both of these headline figures were ahead of what Wall Street analysts were forecasting.
The biggest story continues to be the cloud segment, known as Amazon Web Services (AWS). It posted a year-over-year revenue gain of 37%, which was the fastest growth rate in 18 quarters. Operating income for the division climbed 63% to $16.6 billion, accounting for 60% of Amazon's total.
It's still a battle to satisfy the incredible demand for computing resources. AWS has a backlog of almost $500 billion. The artificial intelligence and chips businesses each grew triple-digit percentages last quarter.
Amazon is showing no signs of taking its foot off the gas pedal. Capital expenditures (capex) are now set to total a whopping $220 billion in 2026, up from the prior outlook of $200 billion three months ago. Management called out higher memory costs as the reason for the higher spending plan.
The business reported a $7.6 billion free cash outflow for the trailing-12-month period. This is a new reality investors have to get accustomed to. Looking to the future, it's difficult to tell if or when the massive capex cycle will taper off and lead to burgeoning free cash flow (FCF).
The buy decision comes down to valuation
Amazon's other business lines are also performing well. Online stores, third-party seller services, and digital advertising registered accelerating revenue growth in Q2. It's extremely difficult not to have an optimistic view of this company.
The buy decision right now depends on your view of the valuation. The stock trades at a near 10-year low price-to-operating-cash-flow multiple of 18.3. That's an attractive setup.
If you purchase shares, however, you must be very bullish on Amazon's ability to monetize its sizable AI investments, which are pressuring FCF today. Based on the success of AWS and the rest of the business, investors would be wise to consider adding the stock to their portfolios.
Should you buy stock in Amazon right now?
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Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Amazon. The Motley Fool has a disclosure policy.
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