It’s been a strange second-quarter earnings season so far for my growth portfolio. Volatility has increased, with sharp stock moves in both directions.
For example, Roblox jumped 10% on the day it released its report (31 July), as did Rolls-Royce. But Ferrari fell more than 11%, marking the Italian sportscar maker’s worst day since going public back in 2016.
Elsewhere, my second-largest holding MercadoLibre reported yesterday (4 August). As I write, shares of the Latin American e-commerce giant are down 6% in the pre-market. So there has been a lot of volatility.
Double-digit growth
While not a shareholder, I keep a close eye on Amazon (NASDAQ: AMZN). The e-commerce and cloud computing juggernaut reported earnings last week, and some investors didn’t like what they saw. The shares are down 9.6% since the release.
However, I thought Amazon turned in a very solid quarter. Revenue jumped 13% year on year to $167.7bn, beating Wall Street’s estimates. This was boosted by sales in the international segment (+16%), and 17.5% growth for its cloud computing platform (AWS).
During the quarter, Amazon expanded early access to Alexa+ and reintroduced Nike products following a six-year hiatus. An integration with Roku was signed to boost the targeted advertising opportunity, while new AWS agreements were inked with PepsiCo, Airbnb, London Stock Exchange, and more.
CEO Andy Jassy commented: “Our conviction that AI will change every customer experience is starting to play out.”
So what was wrong?
One problem here appears to be that this growth is coming at a price. Quarterly operating expenses were higher, and Amazon said full-year capital expenditure could top $118bn, up from a previous estimate of about $100bn.
Also, some investors were unimpressed that AWS ‘only’ increased sales by 17.5%. They pointed to Microsoft Azure and Google Cloud, which both grew more quickly in Q2.
However, as well as being necessary, my view is that these AI investments will eventually pay off. For example, the opportunity for Alexa+, its next-generation assistant powered by generative AI, seems exciting. Management said there could eventually be a standalone subscription for this.
Meanwhile, AWS is hardly struggling, with an annualised revenue run rate exceeding $123bn. It’s still the number one cloud player, so I wouldn’t expect it to be growing as quickly as smaller rivals every quarter.
That said, it’s worth keeping an eye on AWS, as losing market share to cloud rivals is a long-term risk.
Levers
Right now, the company is prioritising long-term growth over short-term profits. I think that’s the right call. And it’s worth remembering that Amazon has plenty of levers it could pull to boost profitability when the time is right, likely making the stock more attractive down the line.
Finally, it’s worth noting that Amazon has quietly become an advertisement juggernaut (quarterly ad sales jumped 23%). Indeed, it’s the third-largest advertising business in the world, behind only Google and Meta (Facebook/Instagram).
Final thoughts
The US market is close to a record high, with many growth shares expensively valued. Paired with renewed tariff uncertainty, which also adds risk here, we have a recipe for further volatility.
If Amazon keeps falling, I will become seriously interested. But with the stock already down 12.5% since February, investors might want to consider striking now while the iron is hot.
