Amazon experienced a 4% decline in its stock after reporting weaker-than-expected growth in its cloud unit, despite surpassing revenue and profit expectations for the holiday shopping period.
Amazon reports lower-than-expected growth in cloud unit and experiences 4% stock drop
For the October-December period, the Seattle-based e-commerce and technology company announced a revenue total of $187.8 billion, marking a 10% increase from the same period in 2023. The profits reached $20 billion, translating to earnings per share of $1.86, which exceeded the $1.49 forecast by analysts surveyed by FactSet.
The following details compare Amazon’s report with Wall Street expectations:
- Earnings per share: $1.86 vs. $1.49 expected, according to LSEG
- Revenue: $187.79 billion vs. $187.30 billion expected, according to LSEG
Key revenue figures of interest included:
- Amazon Web Services (AWS): $28.8 billion, matching estimates from StreetAccount
- Advertising: $17.3 billion vs. $17.4 billion expected, according to StreetAccount
Looking ahead, Amazon forecasted sales for the current quarter to be between $151 billion and $155.5 billion, falling short of analyst expectations of $158.5 billion. The company attributed this guidance to an anticipated unfavorable impact from foreign exchange rates, estimated at $2.1 billion or 1.5%.
The U.S. dollar index reached its highest level in over two years last month, heightening its value against a basket of other currencies. Amazon’s forecast suggests a revenue growth of only 5% to 9% in the first quarter, which would represent the slowest growth on record since the company went public in 1997.
In the fourth quarter, revenue increased from $170 billion to $187.8 billion compared to the same quarter a year earlier, and net income nearly doubled, rising from $10.6 billion ($1 per share) to $20 billion ($1.86 per share).
CEO Andy Jassy’s cost-cutting measures since late 2022 included laying off over 27,000 corporate employees in 2022 and 2023, with continued job cuts in 2024. These strategies have helped Amazon increase its profits, buoyed by steady growth in its high-margin cloud business, which saw its operating margin rise to 11.3% from 11% in the previous quarter and 7.8% in the fourth quarter of 2023.
Although AWS sales grew 19% year-over-year compared to a 13% increase the previous year, they fell slightly short of consensus expectations. In contrast, Microsoft’s Azure and other cloud services revenue surged by 31%, while Alphabet’s cloud revenue grew by 30%.
Amazon’s capital expenditures reached $27.8 billion during this quarter, compared to $14.6 billion a year ago. Significant investments were made in data centers and equipment, including Nvidia processors, to bolster its artificial intelligence (AI) offerings. Amazon anticipates increasing capital expenditures to $100 billion by 2025, compared to approximately $83 billion in 2024, as demand for AI services grows.
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In the earnings release, Jassy emphasized investments in AI, highlighting new AI models named Nova and their proprietary Trainium chips. He stated, “These benefits are often realized by customers (and the business) several months down the road, but these are substantial enablers in this emerging technology environment and we’re excited to see what customers build.”
Advertising revenue rose 18% to $17.3 billion, reflecting ongoing substantial spending by brands for visibility on Amazon’s platform. Amazon has solidified its position as one of the top digital ad companies in the U.S., trailing only Alphabet and Meta.
As of the market close on Thursday, Amazon shares had increased by 9% for the year and 44% in 2024, outperforming the Nasdaq, which gained 29%.
However, Amazon’s guidance for the current quarter indicates revenue expectations of $151 billion to $155.5 billion, which signals lower performance compared to analysts’ predictions of $158.56 billion. The company also flagged an “unusually large, unfavorable impact” from foreign exchange rates.
With respect to its retail business, Amazon reported $75.5 billion in online shopping revenue for the quarter, reflecting a 7% increase from the same period in 2023. This comes alongside industry data indicating better-than-anticipated holiday sales due to lower inflation on goods, which attracted shoppers, and record online sales as noted by Adobe Analytics.
Amazon, alongside its AI initiatives, noted that the recent introduction of a 10% tariff by President Donald Trump on Chinese imports could impact its operations. While tariffs may increase costs for competing firms, they might also affect Chinese sellers on Amazon’s platform and potentially influence price structures on its Amazon Haul storefront, designed to compete with firms like Shein and Temu. Morgan Stanley analysts indicated that Amazon’s first-party retail business faces significant exposure to these tariffs, estimating that 25% of merchandise sold through it comes from China.
The possibility of Amazon’s stock dipping below $210 hinges on multiple factors, particularly investor sentiment around its cloud growth trajectory. While AWS remains a dominant force in cloud computing, its deceleration relative to rivals like Microsoft Azure and Google Cloud raises concerns about long-term market share and revenue diversification. If Amazon fails to reassure investors about sustained cloud momentum, coupled with broader economic headwinds like foreign exchange impacts and shifting enterprise IT budgets, further declines in stock value could follow. Additionally, the company’s ambitious AI-driven infrastructure investments, though promising, may take longer to yield returns, adding pressure to near-term profitability.
Featured image credit: Andrew Stickelman/Unsplash
