Why we're keeping our buy rating on Amazon — even as shares tumble after earnings

Amazon on Thursday dered better-than-expected results on both the top and bottom lines for the second quarter

But a small revenue beat from Amazon Web Services and mixed third-quarter guidance weren't enough to impress investors, knocking the stock down after hours

Revenue increased 13% year over year to $167.7 billion, beating expectations for $162.09 billion, according to estimates compiled by LSEG

Bottom line The market will nitpick a couple of areas in the quarter over the next few days, including questioning why AWS didn't der the same type of revenue upside as rivals Microsoft Azure and Google Cloud

The criticism is fair, but we don't see it as a sign that AWS is losing out on the AI race

And while the company's guidance for operating income didn't up to expectations, management is known for viding a wide range and beating initial jections

Therefore, we urge caution in reading too deeply into the light outlook when the company is jecting another quarter of healthy revenue growth

Most importantly, the thesis on Amazon is unchanged

The drivers we look at to determine the long-term direction of the stock are revenue growth from AWS and advertising — the two high-margin revenue s

Both were above expectations

Online stores are also important, but our focus there is on management's ability to further lower the cost of serving customers

If there are opportunities to bring costs down, which there are, margins should continue to expand

And as we've said before, if margins are going higher, the stock price

The upside here wasn't as eye-popping as what Microsoft Azure reported on Wednesday , leading to some disappointment

Once again, management said its AI cloud — which was reaffirmed as being a multi-billion-dollar growing annually at a percentage rate in the triple digits — had enough supply to keep up with demand

In the post-earnings call with investors, Amazon CEO Andy Jassy pointed to several areas facing supply constraints, but emphasized that the biggest challenge at the moment is access to power

This helps explain why s of GE Vernova , one of the largest manufacturers of gas turbines in the world, have doubled this year

Other areas of constraint are chips and components to make the servers

Jassy said it will take several quarters to resolve these shortages, echoing what Microsoft's Amy Hood said on Wednesday

But margins from the cloud computing segment were disappointing, too

The company cited a seasonal step up in stock-based compensation costs, higher depreciation expense, and FX rates as reasons for the margin decline from last year

It was revenue beats across the board for the rest of the company's segments

Jassy shot down some of the recent reporting that said prices have increased on the e-commerce platform as a result of tariffs. "There continues to be a lot of noise the impact that tariffs will have on retail prices and consumption

Much of it thus far has been wrong and misreported," he said. "As we said before, it's impossible to know what will happen." "But what we can is what we've seen thus far, which is that through the first half of the year, we haven't yet seen diminishing demand nor prices meaningfully appreciating," Jassy added

Amazon Why we own it : Amazon may be widely known for online shopping, but its cloud is the real breadwinner

Advertising is another fast-growing with high margins

Investment in robust e-commerce logistics infrastructure makes its online storefront the place to be as management works to aggressively decrease dery times and reduce overall costs

Prime leverages free shipping and ing with tons of other perks to keep users paying every month

Margins for both regions imved from the first quarter as the company continued to reduce the cost to serve its e-commerce customers

Amazon also got a benefit from the recently deployed DeepFleet, an AI model that manages the movement of its robotics in fulfillment centers

Jassy said DeepFleet is helping robots travel more efficiently, translating to faster dery times and lower costs for customers

The primary driver of these investments will go to AWS to support demand for AI services, but Amazon is also in its fulfillment and transportation network

With earnings from the cloud computing "hyperscalers" now complete, once again we saw all the major players spend more than anticipated and signal plans to invest more aggressively in the quarters ahead

Online sales are expected to increase in the third quarter over the second, and one reason why is the successful four-day Prime Day shopping event held earlier in July

Jassy said it set records for sales, number of items sold, and the number of Prime signups in the weeks leading up to the longer event

Guidance always matters, but so does historical context

The company has a history of undermising and overdering

Here's a good example of what we mean by this: Three months ago, Amazon management said it expected second-quarter revenues to be between $159 billion and $164 billion, a range that ved to be too conservative since Amazon just reported $167.7 billion in sales

The same goes for operating income

Amazon won't beat the high end of its outlook every quarter, but we take some comfort that the top end of its third-quarter outlook is above the consensus forecast. (Jim Cramer's Charitable Trust is long AMZN

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