What Happened?
Shares of cloud computing and online retail behemoth Amazon (NASDAQ:AMZN) fell 7.1% in the afternoon session after the company reported underwhelming fourth-quarter results: its revenue and operating income guidance for the next quarter both fell short of Wall Street's estimates.
AWS, its cloud business and a key growth driver, also missed Wall Street's expectations. While sales accelerated compared to the previous year, AWS faces tough comparisons to peers like Microsoft and Google, growing at a much faster pace. The Cloud business is projected to benefit from the booming AI market, and the roughly in-line performance suggests some investors might have to wait for more quarters of data to make better projections. The company is preparing for the opportunity ahead. Its capital expenditures for 2025 are projected at $100B, with the bulk of the increase expected to support its cloud business and AI services.
Moving away from the cloud business, the Advertising segment, another significant growth bet, missed expectations by a whisker. This put a lot of pressure on the eCommerce business to deliver, which it did across its online and physical stores, though there were pockets of weakness in its third-party seller services segment.
Looking ahead, the e-commerce segment faces uncertainty as analysts are yet to give a clear verdict on how this business will be affected by ongoing trade wars.
Overall, the quarter itself was solid as Amazon beat analysts' operating profit and EPS expectations this quarter. Zooming out, we think this was a decent quarter with mediocre guidance.
The shares closed the day at $229.22, down 4% from previous close.
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What The Market Is Telling Us
Amazon’s shares are very volatile and have had 29 moves greater than 2.5% over the last year. In that context, today’s move indicates the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The biggest move we wrote about over the last year was 3 months ago when the stock gained 7.6% on the news that the company reported impressive third-quarter earnings. Amazon blew past analysts' EPS and operating income expectations during the quarter, giving credence to the argument that the company can be much more profitable and high margin going forward. Operating profit guidance for next quarter also came in ahead.
Taking a closer look at the operating segments, AWS (Amazon Web Services), grew 19% year on year, in line with analysts' estimates, while operating margin beat handily. Notably, AWS reached a revenue run rate of $110 billion amid growing demand for cloud and AI services.
Advertising revenue, which is a promising growth driver, also exceeded Wall Street's expectations. AMZN noted that the advertising business recorded strong margin expansion, helping to make sense of the improvements in profitability recorded in the quarter. It wasn't a perfect quarter, as revenue guidance for the next quarter was underwhelming. Given the excitement around margins, though, the market is overlooking the revenue guidance shortfall.
Overall, we think this was a very good quarter showing that there might need to be more bullishness around Amazon's long-term margin structure.
Amazon is up 4% since the beginning of the year, and at $229.03 per share, it is trading close to its 52-week high of $242.06 from February 2025. Investors who bought $1,000 worth of Amazon’s shares 5 years ago would now be looking at an investment worth $2,203.
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