Amazon's Dim Q3 Operating Income Outlook: Should You Hold the Stock?

Core Insights - Amazon reported strong Q2 results with revenues of $167.7 billion, exceeding estimates by 3.32%, and earnings per share of $1.68, beating consensus by 26.32% [1][10] - Despite strong performance, the stock fell over 7% in after-hours trading due to concerns over Q3 guidance and operational efficiency [1][10] Financial Performance - Q3 operating income guidance is set between $15.5 billion and $20.5 billion, compared to $17.4 billion in Q3 2024, indicating uncertainty in profit margins [2] - The Zacks Consensus Estimate for 2025 net sales is $706.45 billion, reflecting a growth of 10.74% year-over-year, while earnings are expected to reach $6.7 per share, a 21.16% increase [3] AWS Performance - AWS reported a 17% year-over-year growth to $30.9 billion, but operating margins declined from 39.5% to 32.9% due to stock-based compensation and rising depreciation from AI investments [4] - AWS backlog reached $195 billion, up 25% year-over-year, indicating strong future demand despite supply constraints [5] Retail Segment Performance - Online store sales increased by 11% to $61.5 billion, seller services revenues rose 11% to $40.3 billion, and advertising revenues grew by 23% to $15.6 billion, showcasing Amazon's e-commerce strength [6] Investment and Strategic Outlook - Amazon plans to increase capital expenditures to over $100 billion in 2025, primarily for AI infrastructure, which may pressure near-term profitability [7] - The company faces macroeconomic challenges that could affect consumer spending, including recession fears and trade policies [8] Valuation Metrics - Current valuation metrics indicate Amazon trades at a premium, with a forward 12-month price-to-sales ratio of 3.18X, above the industry average of 2.17X [9][12] Competitive Landscape - AWS holds a 30% share of the global cloud market, despite a 2-point decline year-over-year, while Microsoft and Google are aggressively expanding their AI offerings [14][15] - The cloud computing market is experiencing robust growth driven by AI adoption, but increased competition may pressure AWS's margins [15] Stock Performance - Amazon's shares have declined 4.6% over the past six months, underperforming the broader retail sector and the S&P 500 [16]