Gloomy guidance and increased cloud competition weigh on Amazon’s stock, despite solid earnings beat – News

Shares of Amazon.com Inc. were trading more than 6% lower after-hours today, after the e-commerce and cloud computing infrastructure giant could only offer light guidance for the current quarter.

The decline came in the wake of some fairly decent numbers from Amazon as it posted its second-quarter financial results, beating Wall Street’s targets on earnings and revenue. Amazon reported earnings before certain costs such as stock compensation of $1.68 per share, easily beating the $1.33 per share forecast, while revenue for the quarter came to $167.7 billion, up 13% from a year ago and ahead of the $162.09 billion analyst consensus estimate.

The company also reported operating income of $19.2 billion for the quarter, up from $14.7 billion in the year-ago period, while net income came to $18.2 billion, up from $13.5 billion 12 months prior.

However, what disturbed investors was the company’s miserable operating income outlook. Amazon said this could fall anywhere between $15.5 billion and $20.5 billion, but the midpoint of that range is substantially lower than Wall Street’s forecast of $19.48 billion.

The guidance appears to have caused panic among investors, who are increasingly concerned about the company’s sky-high artificial intelligence investments. Amazon has previously committed to spending up to $100 billion this year on building out the data centers to run AI models, and software that makes use of them.

Amazon’s stock headed south during a conference call, where Chief Executive Andy Jassy (pictured) was busy fielding some tough questions from analysts regarding the level of spending and the increased competition it faces in the cloud. Jassy did his best to emphasize that Amazon retains a “significant” cloud leadership position, adding that he’s “optimistic” about the strength of its AI products and services.

“Our AI progress across the board continues to improve our customer experiences, speed of innovation, operational efficiency, and business growth, and I’m excited for what lies ahead,” Jassy said in a statement.

With regard to the cloud, the Amazon Web Services Inc. business unit delivered total sales of $30.87 billion in the quarter, up 18% from a year ago and just ahead of the Street’s forecast of $30.8 billion.

AWS continues to dominate the cloud computing infrastructure market, but its lead isn’t as big as it was, for it faces relentless competition in the face of Microsoft Corp. and Google LLC, and also even smaller players like Oracle Corp. and dedicated AI cloud providers, such as CoreWeave Inc.

The company’s substantial lead in cloud makes it much harder for AWS to match those rival’s growth rates. While AWS revenue was up 18%, Microsoft Azure and Google Cloud recorded growth rates of 39% and 32% in their most recent quarters, which means they’re slowly chipping away at Amazon’s lead.

“We have a meaningfully larger business in the AWS segment than others,” Jassy told analysts in response to a question about the threat posed by those rivals. “I think the second player is about 65% of the size of AWS.”

AWS continues to be a major driver of profit for Amazon, generating operating income of $10.2 billion during the quarter, representing just over half of the company’s total. During the quarter, AWS revealed plans to open a new data center region in Chile before 2027, and said Pepsi Co. has signed up for a large multiyear contract that will see it move various critical workloads to the AWS cloud.

Jassy insisted that customers continue to choose AWS because they see it as the industry’s most secure cloud infrastructure platform.

“For most companies, they’re putting data that they really care about into the cloud,” he told analysts. “The security and privacy of that data matters a lot, and there are very different results in security in AWS than you’ll see in other players.”

The results from Amazon’s advertising business were more encouraging, with ad revenue rising 23% from a year earlier to $15.69 billion, surging past the analyst target of $14.99 billion. Of course, the ad business remains much smaller than AWS or the company’s retail business, but it’s still responsible for a growing chunk of Amazon’s profits, as the world’s third-largest ad platform, behind only Google and Meta Platforms Inc.

Google’s parent company Alphabet Inc. last week reported that ad sales rose 10% in its most recent quarter, while Meta said yesterday that its ad revenue climbed 22%, slightly slower than Amazon’s, both off a bigger base.

As for retail, sales in Amazon’s online stores increased 11% from a year earlier to $61.5 billion, surpassing the Street’s target of $59 billion, while the seller services unit delivered $40.3 billion in revenue, also up 11%. Analysts were expecting just $38.7 billion in sales there.

Some analysts were more bullish about the company’s prospects. “In the end Amazon operates two high-margin growthy businesses and a massive low-margin logistics business with unmatched scale with the potential to materially juice margins medium to long term using AI in combination with robotics,” Pivotal Research Group analyst Jeff Wlodarczak said in a note to clients. The firm raised its target price to $285 a share and reiterated its buy rating.

Amazon’s prediction for third-quarter revenue was a little better, at least. The company estimates sales of between $174 billion and $179.5 billion, which would mean growth of between 10% and 13%. That’s more optimistic than the Street, with analysts aiming for just $173.1 billion in third-quarter sales.

Once again, Amazon’s guidance came with a caveat that warned how “recessionary fears” and “tariff and trade policies” could yet affect its results in unforeseen ways. The constantly shifting trade polices of U.S. President Donald Trump could potentially have a big impact on Amazon’s retail business, though consumer spending has so far proven resilient this year.

On the conference call, Jassy told analysts that the tariffs haven’t impacted on consumer demand, nor have they driven up prices, as some had feared. “If costs end up being a little higher, we will absorb them,” he added.

The after-hours price drop means that Amazon’s stock is up just over 6% in the year to date, trailing the broader S&P 500 Index, which has gained 8% in the same period.

Photo: Robert Hof/ News