Amazon Earnings Beat Expectations. Why the Stock Is Falling.

Attendees walk through a 2023 conference hosted by Amazon Web Services in Las Vegas. (Noah Berger/Getty Images for Amazon Web Services)

Amazon.com reported solid second-quarter earnings that beat expectations Thursday afternoon.

Earnings rose to $1.68 a share versus Wall Street’s consensus estimate of $1.33, according to FactSet, and were up from $1.26 last year. Revenue for the quarter reached $168 billion, above expectations for $162 billion, and up 13% on the year.

Amazon stock, however, fell 8.4% to $214.44 in Friday premarket trading. Investors might be disappointed with management’s third-quarter guidance. Though the revenue projection was strong, the outlook for operating income wasn’t, making it appear that something is weighing on expectations for third-quarter profitability.

It could be tariffs driving up Amazon’s cost-of-goods sold. Because of implementation lags behind and changing pronouncements from the White House, the full effects of tariffs haven’t been felt yet. The average U.S. tariff rate in the first quarter was 2.4%, but that rose to 6% in April, 8% in May, and 10% in June. This number will likely keep rising as new tariffs become effective.

That means the effect of the taxes on Amazon’s costs were probably minor in the second quarter. CEO Andy Jassy spoke to the issue in his prepared remarks on the earnings call.

After highlighting all the uncertainties around how the issue will play out in the rest of 2025, he said that “through the first half of the year, we haven’t yet seen diminishing demand nor prices meaningfully appreciating.”

Amazon Web Services invented the modern public cloud, and it still leads the pack. Demand for artificial-intelligence cloud servers continues to outstrip supply, and this has reinvigorated growth in the maturing segment.

AWS’s sales were up 17% on the year to $31 billion in the second quarter, on par with expectations. Though representing only 18% of Amazon’s revenue, AWS brought in 53% of the operating profit, up 9% from 2024, but that apparently wasn’t good enough for investors.

AWS’s operating margin dropped to 32.9% this year from 35.5% in the second quarter of 2024. Chief Financial Officer Brian Olsavsky attributed the shortfall to the timing of share-based compensation and increased depreciation costs from capital expenditures.

Of course this issue of capital expenditures looms. Because AWS has the largest cloud that needs to grow capacity quickly to meet artificial-intelligence demand, and the company also buys warehouses, robots and vehicles for retail, Amazon has the highest capex in Big Tech. In the first half of the year, Amazon spent $56 billion, and projected it would spend about another $60 billion in the remainder—well ahead of analysts’ expectations.

And then there are the four-fifths of Amazon’s revenue that aren’t AWS, most of it from retail. Amazon’s retail segments had a banner quarter, combining for $107 billion in sales. Revenue was up by 11% from 2024, a rapid pace for a retailer that large, and well ahead of the Wall Street consensus.

Lately, the wild cards in Amazon’s reporting have been its fast-growing subscription and advertising sales. Together they reached $28 billion in second-quarter sales, up 18% annually, with ad sales leading the charge at 22% growth.

While AWS saw its profitability challenged this quarter, the rest of Amazon did better. These segments earn a lower operating margin than AWS—6.6% in the quarter—but that was well ahead of expectations for 4.7%.

Write to Adam Levine at adam.levine@barrons.com