Amazon stock is on pace for its worst trading day so far this year, as investors digest the tech giant's second quarter earnings report. Despite a strong performance from its cloud business and better-than-expected earnings, Amazon missed overall revenue projections.
While Amazon Web Services is seeing strong demand from enterprises for AI related cloud-computing, company officials told analysts that consumers are treading cautiously. That will likely bring more scrutiny to Amazon's sprawling retail operations. Weaker consumer spending could challenge gains that Amazon has made in overall profitability, particularly as it scales up spending to build data centers that power its AI services.
"The concern from here likely switches from AWS re-acceleration concerns to views of a softening consumer, effect on margins and rising capex intensity (where have we heard this before)," wrote RBC analyst Brad Erickson in a client note late Thursday.
Amazon stock is being hit by similar concerns about returns about AI investments that drove down Microsoft and Alphabet stock following their Q2 reports.
On the stock market today, Amazon stock is down more than 9% at 166.49 in recent action. Amazon was down as much as 12% earlier in the day. That would have marked Amazon's largest percent decrease in a day since April 29, 2022, when it fell 14%, according to Dow Jones Market Data.
Amazon Stock: Cloud Growth Accelerates
Investors have spent the past year laser-focused on the revenue growth for the Amazon Web Services cloud business. Since AWS drives the majority of Amazon's profits, investors fretted as the division's rapid growth rate began slowing in 2022. But cloud revenue has now accelerated in back-to-back quarters for Amazon.
"Our AI business continues to grow dramatically with a multibillion-dollar revenue run rate despite it being such early days," Amazon Chief Executive Andy Jassy said on a conference call with analysts Thursday.
Beyond that, Jassy told analysts that companies are no longer "optimizing" their cloud spending. They are instead launching new projects, he added.
AWS sales grew 18.7% year-over-year to $26.3 billion, the company said. Analysts were expecting sales growth of 17.6% for AWS prior to the report, according to FactSet. Meanwhile, AWS provided a better-than-expected $9.3 billion in operating income for the quarter.
But concerns may be shifting to the other, more famous part of Amazon's technology empire.
"Enterprise demand for cloud and AI is strong," wrote Jefferies analyst Brent Thill in a client note Thursday. "However, consumers are being very value-conscious. While more are choosing to shop on Amazon, they are buying cheaper items and spending less on high-priced discretionary items."
Amazon Customers 'Trading Down'
Sales for Amazon's North America division grew 9% to $90 billion for the quarter. Sales grew 12% in Q1. The North America division includes all retail sales, advertising and subscription services revenue in the region. And Amazon's Q3 total revenue guidance of $156.25 billion, at the midpoint of its range, was short of the $158 billion previously projected by analysts.
Jassy told analysts that "customers continue to trade down on price when they can." He added that larger purchases like computers and television are growing faster at Amazon than competitors but "more slowly than we see in a more robust economy."
Meanwhile, advertising revenue increased 20% to $12.8 billion, compared to the $13 billion forecast by analysts. Advertising is Amazon's fastest-growing division and a key source of retail profits.
Jassy has focused on improving Amazon's retail profitability in his three years leading the company. But the $5.1 billion in second quarter operating income from Amazon's North America operations came in below expectations. Chief Financial Officer Brian Olsavsky told analysts that Amazon stepped up spending on its Kuiper satellite internet initiative.
Still, investors could be concerned about North America retail profitability if customers are cutting back on spending. It doesn't help that Amazon is facing stepped up challenges from China-based discount e-commerce sellers Shein and Temu.
Amazon guided for operating income of $13.25 billion, compared to analyst expectations of $15.3 billion. The company said to expect stepped-up capital expenditures, with a focus on AI.
"We suspect the Street is increasingly looking for more margin upside, much of which should be driven by the North America segment, which instead showed a modest sequential slide," noted William Blair analyst Dylan Carden wrote to clients Thursday night.
Amazon Stock No Longer Outpacing S&P 500
The post-earnings slide adds to a rough run for Amazon stock. It was only four weeks ago that Amazon was trading at record highs around 200 and exceeded a $2 trillion market cap for the first time in its history. But shares have fallen more than 15% since then.
Still, analysts remain bullish. Several firms released reports lowering their price targets for Amazon late Thursday and early Friday. But the stock still holds near universal buy calls from the 66 analysts who follow it, according to FactSet.
"Our long-term thesis is unchanged, Amazon is positioned to deliver sustainable operating margin growth over a multiyear period that exceeds megacap peers including Meta and Alphabet," wrote Wedbush analyst Scott Devitt on Friday. "The underlying revenue mix shift to higher-margin AWS and advertising revenue is structural and will contribute billions of dollars of incremental profit each year."
At Bernstein, analyst Mark Shmulik described Amazon as a "coiled spring." He expects AWS sales to continue accelerating and stronger ad growth in the second half of this year, as Prime Video ramps up.
"Amazon is a crowded stock for a reason – a market leader in commerce, cloud, and advertising with accelerating profit pools," Shmulik wrote. "But there's also the burden of living up to investor expectations in a tricky market."
Amazon Stock Technical Scores
Coming into the report, Amazon stock had an IBD Composite Rating of 78 out of a best-possible 99, according to IBD Stock Checkup. The score combines five separate proprietary ratings into one rating. The best growth stocks have a Composite Rating of 90 or better.
Further, Amazon's IBD Relative Strength Rating was 82 out of 99. The RS Rating means that Amazon has outperformed 82% of all stocks in IBD's database over the past year.
