Earnings Preview | Amazon's "AI Laggard" Label to be Removed, Advertising Business May Become a Dark Horse

According to Zhitong Finance APP, Amazon (AMZN.US) will announce its third-quarter results after the U.S. stock market closes on October 30 (the morning of October 31 Beijing time). The market generally expects the company's Q3 revenue to reach $177.8 billion, with an adjusted earnings per share of $1.98, operating profit of $19.8 billion, and a gross margin of exactly 50%.

Performance Review

Amazon's overall performance in the second quarter was impressive: total revenue reached $167.7 billion, exceeding market expectations of $162.09 billion; earnings per share were $1.68, also higher than the forecast of $1.33.

In terms of segmentation, e-commerce sales still accounted for two-thirds of its total sales, with revenue exceeding $100 billion in the second quarter alone. Online store and third-party seller sales both achieved an 11% growth in the second quarter.

According to management, Amazon has expanded its same-day and next-day delivery services to 4,000 small regions; the company has added several brand partnerships, including Origins cosmetics under Estée Lauder (EL.US) and a dedicated Nike (NKE.US) brand store; Amazon has also continued to optimize the inbound channels of regional distribution centers, with the order volume from fulfillment centers to delivery segments increasing by 40% year-on-year, the average transportation distance per package shortened by 12%, and the unit package handling process reduced by nearly 15%.

CEO Andy Jassy stated that these measures are comprehensively enhancing the efficiency of the distribution system, but he also acknowledged the uncertainties that tariff policies may bring.

Amazon Web Services (AWS) revenue grew by 17.5% year-on-year to $30.9 billion, and advertising revenue increased by 23% year-on-year to $15.69 billion. However, due to the slower growth rate of its cloud business compared to competitors, the company has earned the reputation of being a "laggard in the AI field," and the Q3 revenue guidance fell short of market expectations, disappointing investors who hoped for quick returns from its large-scale AI investments. The company's stock price fell 8.27% the day after the earnings report was released.

In the eyes of many investors, to reverse this impression, AWS needs to demonstrate a growth momentum returning to 20% in the future. However, in reality, AWS remains the absolute leader in the cloud computing infrastructure market, and the recent AWS service outage incident reflects the high dependence of the internet on its services.

Amazon is also continuously increasing its investment in data center construction, particularly its AI computing project "Project Rainier," which the company stated will be operational in the second half of 2025.

Jassy stated that the company will continue to invest in chips, data centers, and power sectors, with management believing that generative AI holds unprecedented opportunities.

"Our comprehensive progress in the AI field continues to optimize customer experience, accelerate innovation processes, enhance operational efficiency, and drive business growth, and we are full of expectations for future development prospects," he added.

Chief Financial Officer Brian Olsavsky pointed out in the earnings briefing that capital expenditures in the second quarter reached $31.4 billion, mainly directed towards AWS infrastructure and AI-related fields. He revealed that this level of expenditure "basically reflects" the investment pace for the third and fourth quarters, combined with the $24.3 billion capital expenditure in the first quarter, projecting total capital expenditures for 2025 to reach $118 billion.

Performance Outlook

Similar to the second quarter, investors will still focus on AWS business. Analysts predict that the cloud business unit's revenue in the third quarter will reach $32.4 billion, with an operating profit of $11.1 billion. Additionally, the impact of the significant AWS service outage in October will also be closely scrutinized.

Last quarter, AWS's profit margin was 32.9%, and it is expected to rise to 34.2% in the third quarter, but this level is still below the over 35% level seen earlier this year. S&P Global noted that before the earnings report was released, analysts had significantly different estimates for AWS's profit margin in the third quarter, with estimates ranging from 30.7% to 38.1%.

Also drawing attention is Amazon's business progress in building and operating AI. As mentioned earlier, there are current market concerns that the company has weakened momentum in competition with Google (GOOGL.US), Microsoft (MSFT.US), Oracle (ORCL.US), Coreweave (CRWV.US), and Nebius (NBIS.US). S&P Global stated that the market is closely watching Amazon's investment trends in the AI field, as the company's capital expenditure figures for fiscal year 2026 continue to rise.

Wall Street is generally optimistic about the prospects of Amazon's cloud business.

Wedbush stated that the growth rate of AWS's order backlog and the higher capital expenditure guidance for 2025 indicate encouraging potential demand levels for AWS. Analyst Scott Devitt and his team believe that the risk-reward ratio of the company's stock is quite attractive.

Devitt wrote in a report: "Given the positive comments related to AWS growth, the good trends in the core retail business, and strong demand from advertising clients, we hold a positive view on the overall situation ahead of this earnings report." Notably, the market generally believes that Amazon's operating profit in the third quarter will exceed expectations. The company has given Amazon an "Outperform" rating, with a target price of $280 Bank of America analysts stated that investor sentiment towards AWS remains cautious at present, but this sentiment is expected to improve as time progresses into 2026.

"We look forward to (management) releasing positive signals regarding AWS growth for 2026," they wrote, citing several positive factors such as the increased capacity of the "Rainier project," faster growth of backlog orders, and Amazon's potential focus on showcasing its AI-related new infrastructure at the re:Invent conference in December.

KeyBanc analyst Justin Patterson also believes that investors are overly pessimistic about Amazon's cloud business, making the stock an attractive buying opportunity. For reference, Amazon's stock price has only risen 2.20% year-to-date, making it the weakest performer among the "seven giants" of U.S. stocks.

The analyst expects cloud business growth to continue improving until 2026. At the same time, Patterson believes that Amazon's advertising business is driving retail profit growth, while the fresh grocery business may become increasingly important in the coming years. He also pointed out that Amazon's current stock valuation is far below its historical average.

UBS analyst Karl Keirstead stated that the market's expectation for AWS growth this quarter is around 18%. He is cautious about a short-term rebound in growth, expecting the growth rate to remain at 17% in the third quarter. However, he believes that as cloud computing capacity increases, performance is more likely to break through in the fourth quarter or the first half of 2026.

In addition to the cloud business, Amazon has other positive catalysts.

Last Tuesday, Amazon announced plans to replace 600,000 jobs with robots by 2033 to reduce operating costs, which directly boosted the stock price. In this regard, Benchmark analyst Daniel Kurnos believes that this reform will enhance operating profit margins in the long term.

Morgan Stanley is also focused on the potential billions of dollars in cost savings from Amazon's next-generation robotic warehouses in the coming years. Analyst Brian Nowak recently stated, "We have always believed that the market has not fully recognized Amazon's progress in generative AI within its retail business, where efficiency improvements driven by robotics are at the forefront of innovation." Morgan Stanley has given Amazon an "Overweight" rating with a target price of $300.

Additionally, the advertising business may also bring surprises. Benchmark's Kurnos pointed out that the growth potential and profit margins of this business are expected to surpass those of AWS. "We firmly believe that Amazon's advertising and Prime Video ecosystem will ultimately release tremendous value, and the profit margins resulting from its scaling will be impressive."

Leveraging its vast retail ecosystem, Amazon's advertising business has built a unique advantage through deep integration with small and medium-sized merchants on the platform. Benchmark's research data shows positive progress in this business. "We are confident that Amazon will become a market winner in some form," Kurnos concluded