To The Moon

Amazon Earnings Review: AWS's Blowout Results Perfectly Showcase the Business Value of AI Cloud

$Amazon.com(AMZN)$   released its FY26-Q2 (quarter ended June 2026) earnings after market close on July 30, 2026. This quarter saw AWS grow at its fastest pace in five years, significant overall margin expansion, and both EPS and revenue beating expectations — a comprehensive, high-quality earnings blowout. Key metrics are as follows:

Core Financial Indicators

– Revenue: $200.6B, up +19.6% YoY and +10.5% QoQ, beating the market consensus of $197B.

– Net Income: $62.6B, surging +244.9% YoY, with net margin reaching a record high of 31.2%.

– EPS: $5.75, up +242.3% YoY

The significant increase in net profit was primarily driven by investment income.

The company's second-quarter included approximately $53.4 billion in pre-tax other income, mainly from investments in companies such as Anthropic.

Excluding this impact, second-quarter operating profit reached $27.5 billion, a 43% year-over-year increase, with the operating profit margin rising to 13.7%.

Revenue Breakdown

1. AWS (Amazon Web Services): Revenue of $42.2B this quarter, up +12.4% QoQ (from $37.6B in FY26-Q1), with YoY growth of approximately +36.8% — the fastest pace in five years. AWS became the quarter's biggest growth engine and the core driver of the beat. The significant acceleration in AWS growth indicates robust demand for AI and cloud infrastructure. Meanwhile, AWS's operating margin rose to 39.4% from 37.7% in the previous quarter.

2. Online Stores: Revenue of $70.4B this quarter, up +9.6% QoQ (from $64.3B in FY26-Q1), representing the largest revenue source. As the core retail business, its steady growth provides a solid foundation for overall revenue. The growth rate has also recovered compared to the previous few quarters.

3. Third Party Seller Services: Revenue of $46.8B this quarter, up +12.5% QoQ (from $41.6B in FY26-Q1), growing slightly faster than Online Stores, indicating continued momentum in the platform ecosystem with healthy growth in commissions and fulfillment revenue.

4. Advertising: Revenue of $19.8B this quarter, up +26.2% YoY, one of the fastest-growing segments on a sequential basis. The high-margin nature of the advertising business contributes significantly to overall profitability, continuing to function as a profit engine.

5. Subscription: Revenue of $13.7B this quarter, up +12.5% YoY, with relatively stable growth — a mature business line contributing steady cash flow.

6. Physical Stores: Revenue of $5.8B this quarter, essentially flat QoQ (FY26-Q1: $5.8B), showing weak growth and acting as a drag, though its small scale limits the overall impact.

7. Other: Revenue of $1.8B this quarter, up +11.2% QoQ (from $1.6B in FY26-Q1), negligible in scale.

Growth engines: AWS and Advertising are the core drivers of this quarter's results.

Profitability Quality

Earnings quality improved significantly this quarter, with margin expansion across the board:

Gross Margin: 52.3% (FY26-Q2), up 0.5 percentage points from 51.8% in the prior quarter, the highest level in the last 8 quarters. The continued improvement in gross margin is primarily attributable to the rising mix of high-margin AWS and advertising businesses, as well as improved operating efficiency in the retail business.

Operating Margin: 13.7% (FY26-Q2), up 0.6 percentage points from 13.1% in the prior quarter, also reaching an 8-quarter high. The improvement in operating margin indicates that the company has maintained cost discipline while growing revenue, with economies of scale continuing to be realized.

Expense Ratio Trend: Based on margin trends, the gap between operating margin (13.7%) and gross margin (52.3%) is 38.6 percentage points, slightly narrower than the prior quarter (38.7 percentage points), indicating that selling/G&A/R&D expense ratios remained broadly stable or declined slightly, reflecting good cost control.

Summary

Overall, the earnings report exceeds market expectations: revenue beat, EPS beat, AWS growth at a five-year high, margin expansion across the board. AWS's strong recovery is the core catalyst for this quarter's results, and combined with high advertising growth. 

The stock price increased by more than 9% after the earnings release. 

2 Key Points to Monitor Going Forward:

1. Sustainability of AWS Growth: Key watch items include the persistence of AI-related cloud demand and the operating margin of AWS.

2. Balance Between Capex and Free Cash Flow: 2026 capex guidance was raised to $220B. Whether the massive investment in AI infrastructure can continue to translate into AWS revenue growth will be the most important metric to track over the coming quarters. 

Valuation:

AMZN's PE ratio is 28.17 times, which is at the 23% of its historical range over the past five years.

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