Amazon's Q2 Was A Show Of 'Power,' Morgan Stanley Says

Amazon.com, Inc. AMZN reported Thursday its second-quarter results, which showed the true "power" of its multiple business lines, according to Morgan Stanley.

The Analyst

Morgan Stanley's Brian Nowak maintains an Overweight rating on Amazon with a price target lifted from $1,700 to $1,850.

The Thesis

Amazon's second-quarter earnings report was highlighted by a better-than-expected GAAP operating profit from its high margin revenue businesses, including advertising, AWS and subscription, Nowak said in a note. Encouragingly, the company continues to focus on areas where it needs to improve such as usability of tools for advertisers, smarter recommendations, automating advertiser workflows, measurement& and new ad products.

The earnings also showed the retail operations is becoming more efficient as fulfillment expenses of $600 million was 7 percent lower than expected, the analyst said. This trend is likely to continue for at least the remainder of 2018 as the company grows into and optimizes investments from prior years.

Investor concerns with Amazon's revenue miss in the quarter may be overreacting, according to Nowak. A revenue miss coupled with the stock's high valuation does raise questions related to future market share gains. However, gross profit should be viewed as a "cleaner view" of share gains as it will put the company in a better position to "invest harder and longer" to drive profits higher over the long-term.

Price Action

Shares of Amazon were trading higher by more than 4 percent early Friday morning at $1,887, which is above the stock's all-time high of $1,863.84.

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