AI investments soar, but cloud growth lags rivals
Amazon posted solid second-quarter results that exceeded Wall Street expectations on revenue and profit, but its stock dropped 7% on Friday after a weaker-than-expected profit forecast and slower cloud growth. While revenue grew across core divisions and advertising sales rose 23%, investors focused on competitive pressures and tariff risks.
Capital expenditures jumped to $31.4 billion last quarter and are expected to remain elevated, pushing Amazon’s annual spending potentially to $118 billion. Most of this investment is directed at AI infrastructure. CEO Andy Jassy said Amazon is embedding AI across its platforms and pointed to early monetization via Alexa+, its upgraded digital assistant. Still, specifics on AI-related revenue remained limited.
Cloud competition intensifies amid investor concerns
Amazon Web Services (AWS) reported 18% year-over-year revenue growth, slightly ahead of estimates. However, that lagged Microsoft Azure’s 39% and Google Cloud’s 32% gains. Analysts questioned AWS’s competitive positioning in generative AI, citing fears of market share loss. Jassy responded by emphasizing AWS’s scale and pointing to security advantages over competitors like Microsoft.
Despite Jassy’s reassurances, analysts at Bernstein found Amazon’s tone less compelling compared to peers and warned that investor confidence in AWS’s growth trajectory remains fragile. With cloud services central to Amazon’s profitability, the slower growth rate raised broader questions about future margins.
Retail and advertising offset tariff-related headwinds
Amazon’s e-commerce business delivered stronger-than-expected results, with online store sales up 11% and physical and digital item volume growing 12%. Advertising revenue also surged, contributing to the company’s positive revenue outlook for Q3, which implies up to 13% growth.
While Amazon previously warned about the impact of President Trump’s high tariffs on Chinese imports, the latest earnings suggest the company has managed these pressures better than expected. The current tariff rate of 30%—lower than the earlier threat of 145%—seems to have been absorbed by sellers and suppliers without significantly raising consumer prices or reducing demand.
Outlook steady, but questions linger
Looking ahead, Amazon offered a cautious profit forecast and acknowledged uncertainties tied to tariffs and geopolitical tensions. With the U.S. and China yet to finalize a trade agreement by the August 12 deadline, cost absorption remains a concern. Still, Jassy noted that average selling prices have not broadly increased, and demand remains healthy.
Despite strong fundamentals and aggressive investment in AI, Amazon’s stock decline reflects investor anxiety about execution in key growth areas like cloud and artificial intelligence. As competitors gain momentum and global trade uncertainty lingers, Amazon faces rising pressure to prove its long-term AI strategy and maintain cloud leadership.
