Amazon (AMZN) made a compelling case for itself this earnings season. The company reported its fastest growth in Amazon Web Services (AWS) in 18 quarters, highlighting accelerating momentum in its cloud business. “There’s a lot to be excited about, and we have much more coming for customers in the second half of the year and beyond,” CEO Andy Jassy said in the second-quarter earnings report.
Amazon reported revenue of $200.6 billion. Net income was startlingly high at $62.64 billion, thanks to a $53.39 billion windfall in non-operating income that the company attributed largely to its investment in Anthropic. That helped push EPS to a whopping $5.82.
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AMZN stock is up more than 15% since the company's sterling earnings report, as investors are clearly willing to shrug off Amazon's aggressive AI spending. On the Q2 earnings call, management increased its capital expenditures forecast from $200 billion to $220 billion, and disclosed negative free cash flow of -$7.6 billion for the trailing 12 months.
How should you play Amazon stock in the second half of the year? I think there are three strong narratives at work.
www.barchart.com Amazon Bull Case #1: AI Revenue
Amazon has always had a strong cloud computing business. In fact, it has the greatest global market share at 28%, topping Microsoft (MSFT) Azure and Alphabet’s (GOOGL) Google Cloud. But as companies expand their artificial intelligence offerings, Amazon is generating more revenue in providing AI computing capacity through its cloud platform. Amazon’s AI revenue run rate topped $25 billion in Q2.
For instance, Warner Bros. Discovery (WBD) is using AWS to build and run an agentic-powered advertising platform, while Snowflake (SNOW) is partnering with Amazon so its customers can build and run AI applications on its platform using AWS infrastructure. Meanwhile, Moody’s (MCO) is integrating its credit ratings, research, and risk data with Amazon’s AI platform.
“Customers choose AWS because we offer the broadest capabilities,” Jassy said on the Q2 earnings call. “They want their AI inference to reside near their other applications and data, and more of it resides in AWS than anywhere else. Because AWS has the strongest security and operational performance. We're seeing strong growth across both AI and non-AI, what we call core, and growth in one is driving growth in the other.”
Amazon Bull Case #2: Chips Revenue
One of the biggest expenses for data centers and cloud computing companies is the infrastructure that goes into computing power, including the high-powered semiconductors needed to handle AI workloads. That’s why Nvidia (NVDA) has become so successful — its semiconductors are considered best-in-class and are ultra-powerful to handle even the most complex tasks.
Amazon’s response has been to build its own chips that can handle some advanced AI functions. Amazon’s Trainium and Inferentia chips are designed in-house through the company’s Annapurna Labs with custom silicon to match AWS networking and host CPUs to operate efficiently on the AWS platform.
Other companies are taking notice, and Amazon’s AI chips are becoming a strong revenue stream on their own. Jassy said on the earnings call that the chips business also achieved a $25 billion revenue run rate.
“In addition to the two leading AI labs in the world, Anthropic and OpenAI, making multi-year, multi-gigawatt commitments to Trainium, an increasing number of AI startups are also adopting Trainium, including unicorns like Neurorobotics and Odyssey, joining startups like Twelve Labs, Descartes Labs, Poolside AI, Karakuri, Metagenomi, NetoAI, and Splash Music, and larger companies like Uber (UBER) and Pinterest (PINS) all adopting Trainium,” Jassy stated.
www.barchart.com Amazon Bull Case #3: Anthropic
Anthropic, the AI startup behind Claude, isn’t a publicly traded company yet. However, the company is weighing an initial public offering (IPO) that would reportedly value it at close to $1 trillion. While you can’t invest directly in Anthropic yet, Amazon has become an ideal company to indirectly bet on the AI startup's success, thanks to its early investment.
Amazon has disclosed a $13 billion investment in Anthropic, and reports indicate that it has a 21% stake. But the value of that investment has grown dramatically.
According to public filings, Amazon valued its Anthropic stake at $74.2 billion, including $42.2 billion in convertible notes and $32 billion in nonvoting preferred stock. However, in its Q2 filing, Amazon’s stake is valued at $190.4 billion, with convertible notes at $97.9 billion and nonvoting preferred stock at $92.5 billion. That’s an amazing return on the initial $13 billion investment — and why Amazon was able to report $53.4 billion in non-operating pre-tax income in Q2.
While the core business remains e-commerce and cloud computing, Anthropic has quietly become one of Amazon’s greatest assets. If Anthropic continues to grow and goes public, Amazon will benefit from additional upside, which will be reflected in its bottom line.
On the date of publication, Patrick Sanders had a position in: NVDA . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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