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Amazon (AMZN -10%) is under pressure despite reporting a sizeable EPS beat for Q2. Also, Q2 operating income jumped 91% yr/yr to $14.67 bln, ahead of prior guidance of $10-14 bln. However, revenue was a bit light and the mid-point of the Q3 revenue guidance was below analyst expectations. We also think Amazon's comments about spend in 2H is weighing on shares. That was evident in Amazon's lackluster Q3 operating income guide of $11.5-15.0 bln.

• Let's start with the Stores segment. AMZN saw growth of 9% in North America and 10% in the international segment. Amazon said it's seeing lower ASPs right now because customers continue to trade down on price when they can. More discretionary, higher ticket items like computers or electronics or TVs are growing faster than peers, but more slowly than what AMZN would see we see in a more robust economy.
• Amazon said its faster delivery speed is earning more share of everyday essentials. Seller fees were a little lower than expected given the behavior changes. Also, consumers are being careful on price, however, North America unit growth is meaningfully outpacing sales growth as AMZN's work on selection, low prices and delivery is resonating with consumers. While some of these issues compress short-term revenue, AMZN generally likes these trends.
• Turning to AWS, this segment was the real standout in Q2. AWS posted +19% growth in constant currency (CC). This was a notable uptick from +17% CC in Q1, +13% CC in Q4, +12% CC in Q3, +12% CC in Q2. Given Azure's somewhat lackluster result/guidance earlier this week, we were surprised to see AWS accelerate growth despite a larger base.
• Amazon cited three macro trends driving AWS growth. First, companies have completed the significant majority of their cost optimization efforts and are focused again on new efforts. Second, companies are spending to modernize their infrastructure and moving from on premises infrastructure to the cloud. Third, companies of all sizes are excited about leveraging AI. Amazon says its AI business continues to grow dramatically with a multibillion-dollar revenue run rate despite it being such early days.
• Turning to Advertising Services, segment revenue grew +20% CC to $12.77 bln. This was notably lower than recent quarters: +24% CC in Q1, +26% in Q4, +25% CC in Q3, +22% CC in Q2. AMZN was pleased with its growth given its increasingly larger revenue base. AMZN continues to see opportunities that further expand its offering in sponsored products as well as newer areas like Prime video ads.

In addition to the slight Q2 top line miss, we think investors are disappointed in AMZN's Q3 operating income guide of $11.5-15.0 bln, considering it posted $14.67 bln in Q2. Similar to what we heard from Microsoft (MSFT) this week, Amazon expects capital investments to be higher in 2H24, mostly to build out its AWS infrastructure as it continues to see strong demand in both generative AI and non-generative AI workloads. Also impacting Q3 margin is Prime Day and this year was its largest ever. Additionally, in Q3, AMZN begins to ramp up capacity to handle Q4 holiday volumes. AMZN also expects a sequential increase in digital content costs in Q3 from the return of NFL Thursday Night Football.