TOP STORY
📈 Amazon Soars 15% On Record AWS Growth While Apple Slumps 8%

✨ Big Tech earnings season wrapped up this week with Amazon and Apple reporting their results Thursday night, and like Microsoft and Meta (which I covered a few days ago), we saw two very different market reactions.

• Amazon ($AMZN) soared 15% after reporting AWS’ fastest growth in 5 years

• Meanwhile, Apple ($AAPL) sank 8% after Tim Cook said supply constraints and rising memory chip prices could drive a ‘100-year flood’.

🤿 But before we dive in deeper there, here’s a quick macro update:

• 🏦 This week the Fed kept rates steady this week (3.5%-3.75%), with markets leaning toward a possible September hike given oil-driven inflation and new tariffs.

• ⚔️ Talks of a final U.S.-Iran ceasefire have slowed down with the U.S. and Israel reportedly planning one of the harshest bombing campaigns to date against Iran’s energy infrastructure, which Iran says would be “an act of madness.”

🟢 Despite this, the major US indexes rose this week, pulled up by Microsoft and Amazon's great earnings reports calming nerves about an AI bubble.

📈 Across the indexes:

• The S&P 500 rose +1.05% (up 9.2% year-to-date)

• The Nasdaq 100 rose +0.52% (up 12.2% year-to-date)

• The TSX fell -0.40% (up 10.5% year-to-date)

🔍 So let’s first take a look at Amazon, and why it saw such a big stock jump this week…

📈 Amazon Soars 15% After AWS Grows at Its Fastest Rate in Nearly 5 Years

📊 Across the major numbers, Amazon delivered:

• ✅ Revenue hit $200.6 billion vs. $196.5 billion expected, up 20% year-over-year

• ✅ EPS came in at $1.97 vs. $1.82 expected

☁️ But by far the most important was Amazon’s AI-driven AWS revenue, which grew 37% vs. 31% expected to $42.2B, accelerating from last quarter’s growth and marking its fastest pace in 18 quarters (~5 years).

💬 This growth surge was exactly what Amazon investors were looking for, proven by the 15% jump in the stock price, and Amazon CEO Andy Jassy was quick to double down on the growth story, saying:

💰 What About the Cash Flow?

💸 Now, in the case of both Google and Microsoft, we saw two very different stories. Both saw surging AI revenues, but Google fell into negative cash flow for the first time ever as it continued to increase its AI spending, while Microsoft committed to keeping cash flow positive.

🤔 Well, Amazon is an interesting case, as like Google, it also increased AI spending (now expecting to spend $220B compared to prior estimates of $200B) and reported negative cash flow, but it was instead rewarded by the market - so what’s going on here?

💸 Well, the biggest reason is likely that Amazon’s negative cash flow was expected (with Amazon falling into negative cash flow in Q1), whereas for Google it was its first negative quarter since its 2004 IPO. And in fact, since earnings, Google has more than recovered, rising 12% this week and shaking off the cash flow fears.

💡 On Thursday I said, “investors seem to be ok with high AI spending so long as cash flow isn’t suffering,” but based on Amazon’s results and Google’s recovery this week, it seems that actually investors were just briefly spooked by the cash flow, and are back to giving Big Tech the permission to spend so long as the growth rates continue to soar - which is good news for investors in the AI trade.

💬 As one analyst put it:

🤖 But speaking of AI spending, there’s been one tech giant that’s been noticeably absent from the spending party: Apple. But before we dive into its earnings, a quick word from this week’s sponsor, BMO ETFs!

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EARNINGS RECAP
🍎 Apple Falls 8% As Soaring Memory Chip Prices Hurt Margins

🏆 Apple has been one of the Mag 7’s best performers over the past year, soaring over 50% as the market rewards it for staying out of the AI spending mania. And despite the lack of AI spending, revenue continues to soar.

📊 By the numbers:

• ✅ Revenue hit $109.4 billion vs. $108.7 billion expected, up 16% year-over-year (a June-quarter record)

• ✅ Earnings per share came in at $2.02 vs. $1.89 expected, up 29% year-over-year

  • ✅ iPhone revenue jumped 22% to $54.25 billion, while Mac revenue surged 29% to $10.35 billion (both hitting records)

  • ❌ Services revenue of $30.74 billion missed the $31.22 billion expected

🇨🇳 Revenue in China, Apple’s third-biggest market, also climbed 22% to $18.82 billion, showing that Apple’s struggles in the region seem to be in the rear-view mirror.

🤔 So how does the strongest June quarter in Apple history end with the stock dropping 8%? The main culprit seems to be soaring memory chip prices…

🚨 The "Hundred-Year Flood"

💰 As the AI data center boom drives soaring demand for memory chips, hardware makers are being hit hard. For the upcoming iPhone 18 Pro, memory chips are estimated to cost ~$145, compared to $39 in the 17 Pro (a 272% jump).

🥲 This has led Apple to ‘reluctantly raise prices’ to combat falling margins:

😬 Cook added: "If you look beyond September, we see the market pricing for memory continuing to increase, which could drive an increasing impact on our business."

🧑‍⚖️ Political tensions between the US and China aren’t helping, with US senators sending Apple a letter demanding it rule out sourcing memory from Chinese suppliers as a workaround. And with the memory market controlled by basically 3 companies: Micron, SK Hynix, and Samsung, Apple doesn’t have many options.

🎯 All this led to Apple forecasting 9-11% revenue growth, below the 12% expected, and gross margins down to 47–48% next quarter (from a record 50.1%), both likely the main drivers of the stock drop.

🤖 Apple’s ‘Anti-AI-CapEx Strategy’

👀 Memory Chips and margins aside, another ever-present question on investors' minds is Apple’s AI strategy. Unlike the rest of big tech, which is spending $700B a year on AI infrastructure, Apple's AI budget is basically a rounding error, and analysts are taking notice:

🎨 But others have been increasingly impatient for clarity on Apple’s AI strategy… and lucky for them, Tim Cook finally added a bit more color to how Apple is thinking about AI, outlining 2 key strategies:

1. 📲 Making iPhone the Data Center

• Apple's bet is that AI built on privacy and personal context is therefore best run directly on your device. As Cook put it: "The ability to run some percentage of requests on-device is also very strategic, sort of a competitive weapon if you will." It's strategic for costs too, as every request your iPhone's chip handles is one Apple doesn't pay a data center to process.

2. 🤖 Make AI a Services Upsell

• Cook sees AI as a way to nudge its 1,5B+ iCloud subscribers one tier higher, with certain AI camera features already gated behind the $9.99/month iCloud+ tier, and mentioned that it may bundle usage of the new Gemini-powered Siri (which launches in September) as part of these tiers. The new Siri is already in public beta, and Cook says he has been "absolutely thrilled by the response from people who've been using Siri AI in the developer and public betas."

⭐️ Analysts have been largely positive on Apple’s approach to AI, with Apple’s capex only running at ~2% of revenue. Dan Ives from Wedbush estimates that AI could add an additional $75-100 per share by doubling Apple’s services business, a significant jump especially considering Apple’s lack of AI spending.

🦔 Others are calling Apple a "hedge against hyperscaler spending anxieties," and it seems the drop this week is almost entirely driven by the memory chip crunch rather than concerns about Apple’s strategy and approach.

🎁 To Wrap Things Up

🏁 Overall, this earnings season answered the question we asked last week when Google reported the first negative cash flow in its history - is the market losing faith in the AI trade?

✅ The answer seems to be a resounding ‘no’, but investors do seem to be getting pickier:

• 📈 Microsoft soared for spending big on AI and growing Azure Cloud revenue while keeping cash flow positive

• 📈 Amazon soared for spending even bigger because AWS growth accelerated

• 📉📈 Google was punished for negative cash flow and then fully forgiven within a week

• 📉 Meta was punished because the payoff of its massive AI spending is the most uncertain

• ✨ And Apple dipped due to memory chip prices but continues to be one of the best performers by staying out of the AI mania.

👀 Big Tech is under more scrutiny than ever, and each one is being evaluated separately. For me, I’ll be taking this as an opportunity to re-evaluate the names I’m holding to decide whether I’m aligned with the strategy and approaches they’re taking.

🙋‍♂️ Personally, with this earnings context in mind, I plan to trim my Meta position and buy the dip in Apple, which you’ll be able to see Monday morning if you follow me on Blossom!

😎 Ok, let’s wrap up with some of the top discussions on Blossom this week, but first a quick word from our other sponsor CIBC CDRs!

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FROM THE BLOSSOM COMMUNITY
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