AMZN FH26 result-Top 10 position--strong result and more to come?

 AMZN FH26 RESULT

It may sound glib, but in many ways AMZN is the quintessential growth holding in a portfolio. AMZN continues to invest large amounts of capex, almost exclusively organically, and, for the most part, creates new and profitable businesses from this spend. That means the intrinsic value marches higher over time. Meanwhile, the amount of capex and its impact on FCF, as well as the large and economically sensitive retail business, means the AMZN SP can move around a lot and creates opportunities, which is a positive as well, IMO.

The last result was one of AMZN’s best since I've held it, mainly driven by AWS. Management also started to give some numbers around ROI on AI/DC spend, and the returns look attractive. The narrative is eerily similar across the hyperscalers, but AMZN put more numbers around the thesis.  In aggregate, the results for the half-year showed revenues up 18% and adjusted Operating income up 33%.

Operating metrics for the business continue to be positive. Rev and Op y per ee and GMs are below. Note the positive impact on Op y/ee due to AWS improving the mix and operating leverage, being more profitable than the retail biz. GMs also benefiting from the mix effect of AWS. Both trends should continue as AWS grows much more than retail.

 




For the half, AWS revenues were 33% higher and adjusted operating income (adj for the $0.6b derivative benefit) was 37% higher. The revenue acceleration for AWS was 20%/24%/28%/37% over the last four quarters. The capex spend is seeing revenue and profit acceleration, which is what we want to see. The concern that the hyperscalers are building unused monoliths to their ego’s thesis is being unproven. The demand profile and profitability are coming through in the numbers. Management gave some incredibly bullish statements behind this growth. AWS is annualising revenues at $169B. Within that, the chips, Graviton CPU and Trainium accelerator are a $25B business growing triple-digit, and the AI business is $25b as well, growing triple-digit. Jassy stated that he can see a path to $1T revenue for AWS (6X current). The chart below shows both revenues and, importantly, operating income responding to the increased capex. Big numbers.


Jassy spoke to unit economics for the AI DC’s, with a few numbers given. My read is below. The attractive profitability is due to profitable growth in revenues, so the asset efficiency of sales, ie the volumes and pricing combination, needs to hold. Will we see Jevons paradox here? That would mean as the price for tokens falls, the volumes increase to overcompensate. The use cases and diffusion need to continue. That is the hyperscale bull case. The other variable that Jassy spoke about was server renewal; the ability to push servers' useful life out from 5 to 6 years adds to ROI. The implied ROI’s are attractive and show why the hyperscalers are keen to add as much capital as they can. Finally, Jassy spoke of the customer mix, with the two big users being the foundation model companies (OpenAI, Anthropic) and companies using AI for cost savings and productivity initiatives. Between these two are the workflows that are yet to be brought across to AI for the vast majority of companies, and this will drive growth over the next decade.


There were two positive one-offs disclosed of $0.6B each. One related to AWS being a positive outcome on an energy derivative contract, and the other in NA retail being tariff refunds. Prime Day was also moved into Q2 instead of Q3, so a pull forward of sales will impact Q3 growth rates.


 


The retail business continues its steady improvement. The business add-ons continue, and the International business carries some less mature, subscale businesses. Interestingly, advertising is growing 25-26% and was $37.1B for the half, compared to $20.5B operating income for the combined NA and Intl segments. That shows the importance of advertising to retail profitability. AMZN has an advantage even over Meta and Google given the intent to act on the AMZN site; the advent of agentic commerce may carry some risk to this earnings stream over time.

 



                                        

 New Projects.

AWS continues to pursue a frontier model, for much the same reason as Meta, being cost control and having control of your own destiny and priorities, especially for consumer applications. There is likely to be a benefit in being a fast follower for big tech, with their distribution and captive use cases.

AWS has a series of new products, agentic apps and harnessing the model to the workflow, which will be a target market for the hyperscalers. Products include Kiro (coding), Quick (biz summation), Connect (call centres), Transform (software migration) and Continium (security). SageMaker (model builder) and Bedrock (choice of model) continue to grow.

More broad initiatives include offering AMZN’s Supply chain as a business, which is currently at $60B; more robots, as AMZN will be a leader with its own IP and major beneficiary of robotics in its biz’s; Pharmacy, LEO (low-earth-orbit satellites) and Zoox (robotaxi).

Summary

There are many growth initiatives here, and AMZN has a record of successfully deploying capex. The main structural bear case is that something goes wrong with the huge opportunity in AWS. There could be a dip, delay, or demand may not appear as expected. There could be a change in the bargaining power of hyperscalers and the rest of the AI value chain. There could be ferocious competition between the hyperscalers as many are fishing in the same lake, although the lake is huge at this stage. Really anything that drives that AI DC IRR to the cost of capital or below would be a negative. That is the story to follow as capex continues to ramp up: will the economics hold?

Valuation: AMZN is a stock with so many positive levers, selling it anytime soon isn’t really my focus. Assuming a 5year eps growth CAGR of 22% and a 22X exit multiple generates a 10% return at $200, and I would add near that. On selling, around $320 returns go to zero, so I would possibly think about selling some at that stage.




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