The market ignores Amazon’s retail woes. Should you?

Amazon (AMZN 2.80%) released its second-quarter results last week and Wall Street celebrated like it was 2021. The stock jumped double digits and some analysts rushed to raise price targets. Considering price trends and rave reviews, would you believe me if I told you that Amazon’s quarterly operating profit was cut in half year-over-year (YOY)? In fact, in the first six months of 2022, operating profit fell from $16.6 billion last year to just $7 billion.

So what gives?

Amazon is no longer just an online retail company

For several years, Amazon was known as a massive and growing online retail company with a cloud business attached. No more. Amazon should now be presented as a cloud infrastructure and advertising company with an online retail component. Recent results demand it. Amazon Web Services (AWS) is by far the market leader in cloud infrastructure services, and the growth continues.

Cloud’s fantastic results are why some of us called the perfect time to buy Amazon shares when they fell in May – even before an economic downturn.

AWS is on track to triple its operating profit in just three years. Revenue is up more than 33% so far this year, and operating profit is up 46%.

The cloud segment will produce nearly $83 billion in sales and $27 billion in operating revenue if this pace continues, as shown below.

No wonder investors are clamoring for a slice of this lucrative pie.

Don’t sleep on advertising

Amazon is leveraging its tremendous reach with a booming digital ad revenue stream. Advertising services generated $12.6 billion in sales in 2019. In just six months of 2022, revenue reached $16.6 billion on 20% year-over-year growth. Sales will surpass $37 billion this year if this pace continues. The meteoric rise is pictured below.

Data source: Amazon. Chart and estimate 2022 by author.

Is it sufficient?

Overall earnings have been beaten this year despite the excellent results above. Amazon’s North America and International segments lost $5.2 billion in operations through the second quarter. Net income fell from $15.9 billion in profit to a loss of $5.9 billion during this period. The causes are many, including rising labor, raw material and logistics costs. Retail headwinds could persist as consumer sentiment is listless. But here’s the key: the headwinds will dissipate. It’s just a matter of time. Long-term investors find AWS and digital advertising too good to pass up in the meantime.