Amazon slides as Q3 outlook and increased competition weigh on shares

Amazon's Q2 earnings report delivered mixed results, falling short on revenue expectations but exceeding EPS projections. The company reported net sales of $147.98 billion, a 10% increase year-over-year, but below the estimated $148.78 billion. EPS came in at $1.26, significantly beating the consensus estimate of $1.04, driven by strong operating income of $14.67 billion, which was above the guidance range of $10-14 billion.

The strong quarter was not enough to offset cautious comments around Q3. Shares fell in reaction to the news, slipping from $185 to the $174 area. It has been unable to bounce ahead of its conference call.

Amazon Web Services (AWS) continued to be a standout performer, generating $26.28 billion in net sales, up 19% year-over-year and surpassing the estimate of $25.98 billion. This growth was bolstered by increased demand for generative AI and other cloud services, positioning AWS as a $100 billion annualized revenue business. Operating income for AWS also saw a substantial increase, rising to $9.3 billion from $5.4 billion in the previous year.

In contrast, the company's core retail segments showed mixed results. Online stores net sales were $55.39 billion, a 4.6% increase year-over-year but slightly below the $55.55 billion expected. Physical stores net sales also missed expectations, coming in at $5.21 billion versus the $5.26 billion forecast. Third-party seller services net sales were $36.20 billion, a 12% increase, but fell short of the $36.65 billion estimate.

Amazon's North America segment performed well, with net sales of $90.03 billion, exceeding the $89.98 billion estimate and showing a 9.1% year-over-year increase. However, the International segment lagged, reporting net sales of $31.66 billion, below the expected $32.87 billion but still up 6.6% year-over-year. Operating margins also improved significantly across the board, with North America reaching 5.6%, International hitting 0.9%, and AWS achieving 35.4%.

The company's guidance for Q3 projected net sales between $154 billion and $158.5 billion, slightly below the analyst estimate of $158.43 billion. Operating income is expected to range from $11.5 billion to $15 billion, indicating continued strength despite broader economic challenges. This was below the analyst forecasts of $15.66 bln. The guidance reflects a cautious outlook amid ongoing investments in AI and infrastructure to support AWS growth.

Amazon's expenses, particularly in fulfillment, rose to $23.57 billion, up 11% year-over-year, exceeding the $22.96 billion estimate. This increase is attributed to higher costs associated with expanding its logistics network and improving delivery speeds. Capital expenditures were significant, with over $30 billion spent in the first half of the year, primarily driven by AWS infrastructure and generative AI tool investments.

Consumer behavior trends showed some softness, particularly in a quarter flanked by major sales events like the Big Spring Sale and Prime Day. Amazon faces increasing competition from low-cost retailers like Temu and Shein, prompting the company to develop a discount digital storefront to capture market share in the fashion and lifestyle segments. Analysts noted that consumer spending trends will be crucial for Amazon's future performance, especially as it prepares for the holiday season.

Overall, Amazon's Q2 results highlighted strong performance in its AWS and advertising segments, but the company faces challenges in its core retail business and international markets. The focus on AI investments and infrastructure expansion is expected to drive long-term growth, but investors remain cautious, especially in light of mixed reactions to recent tech earnings. As Amazon continues to navigate a competitive and evolving market, its ability to balance growth initiatives with core business stability will be key to maintaining investor confidence.