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

Amazon AMZN delivered strong second-quarter results with revenues of $167.7 billion, surpassing the Zacks Consensus Estimate by 3.32%, while earnings per share of $1.68 significantly beat the consensus mark by 26.32%. Despite this strength, investors reacted negatively as the stock tumbled more than 7% in after-hours trading, reflecting concerns about forward guidance and operational efficiency.

The disappointment centered on Amazon's third-quarter operating income guidance of $15.5 billion to $20.5 billion compared with $17.4 billion in the third quarter of 2024. This wide guidance range signals uncertainty in management's outlook and raises questions about profit margin sustainability amid intensifying competition and substantial artificial intelligence investments.

The Zacks Consensus Estimate for 2025 net sales is pegged at $706.45 billion, indicating growth of 10.74% from the prior-year reported figure. The Zacks Consensus Estimate for 2025 earnings is pegged at $6.7 per share, which indicates a jump of 21.16% from the year-ago period.

Amazon.com, Inc. Price and Consensus

Amazon.com, Inc. price-consensus-chart | Amazon.com, Inc. Quote

AWS Growth Deceleration Raises Strategic Questions

Amazon Web Services (“AWS”) experienced challenges in the quarter, with operating margins declining from 39.5% in the first quarter to 32.9% in the recent results. Management attributed roughly half this sequential drop to seasonal stock-based compensation, while the remainder stemmed from rising depreciation tied to AI infrastructure investments and foreign exchange headwinds. AWS grew 17% year over year to $30.9 billion, beating the consensus mark by 0.71% but representing deceleration from previous quarters. This growth rate also trails Microsoft MSFT Azure's 39% and Alphabet GOOGL-owned Google Cloud's 32% expansion in the same period.

The AWS backlog was pinned at $195 billion, up 25% year over year, signaling healthy forward demand, though constrained supply — especially power — continues to limit revenue realization. Demand continues to outstrip capacity, and resolution may take several quarters. This supply-demand imbalance highlights both AWS' market strength and its current infrastructure bottlenecks, particularly as hyperscaler competitors intensify their artificial intelligence offerings.

The retail segments delivered solid performance, with online store sales reaching $61.5 billion, up 11% year over year. Seller services revenues increased 11% to $40.3 billion, while advertising revenues climbed 23% to $15.6 billion. These figures demonstrate Amazon's continued e-commerce dominance and expanding advertising ecosystem monetization potential.

Investment Thesis and Risk Assessment

Amazon announced its expectation to increase capital expenditures to more than $100 billion in 2025, up from $83 billion in 2024, with the majority allocated toward building AI capacity for AWS. This massive investment commitment underscores management's confidence in artificial intelligence's long-term potential but also pressures near-term profitability metrics that investors closely monitor.

The company faces macroeconomic headwinds that could impact consumer spending patterns. For the second consecutive quarter, Amazon included recessionary fears, along with tariff and trade policies, as factors potentially affecting its guidance. While tariffs have not yet impacted demand or pricing, ongoing uncertainty creates complexity for forward planning and margin management.

Current valuation metrics suggest that the stock trades at premium levels relative to historical norms, making it vulnerable to disappointments in growth or profitability. Amazon's forward 12-month price-to-sales ratio of 3.18X is significantly above the Zacks Internet - Commerce industry average of 2.17X.

The market's negative reaction to third-quarter guidance demonstrates investor sensitivity to operational deceleration, particularly given substantial resources being deployed in AI infrastructure.

AMZN’s P/S F12M Ratio Depicts Premium Valuation

Cloud Market Dynamics and Competitive Pressure

Recent data from Synergy shows that AWS remains the dominant cloud leader in the world, capturing 30% share of the global market in the second quarter of 2025 despite 2-point decline year over year. Microsoft achieved a 20% share of the global cloud market as the software giant’s share dropped 3 points year over year. Google Cloud continued to grow at 13%, while Oracle ORCL captured 3% market share.

The cloud computing market continues experiencing robust growth, with global infrastructure spending driven by AI adoption programs. While AWS leads in market share, both Microsoft and Google are pushing aggressively into AI and machine learning services. This intensifying competition could pressure AWS' historically strong margins and require additional investment to maintain technological leadership.

Shares of AMZN have declined 4.6% over the past six months, underperforming the broader Zacks Retail-Wholesale sector and the S&P 500. Microsoft, Google and Oracle have returned 26.7%, 7.7% and 39%, respectively.

AMZN Underperforms Sector, Peers In 6-Months

Conclusion

Amazon's premium valuation reflects expectations for sustained growth and margin expansion, but recent results suggest achieving these goals may prove challenging amid competitive dynamics. Supply constraints, particularly compute capacity, continue to limit revenue realization while competitors gain ground in artificial intelligence segments. These factors suggest investors should maintain positions while waiting for attractive entry points, particularly if the stock experiences weakness due to margin pressure or competitive positioning challenges. AMZN currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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