Amazon's Q4 Earnings: Solid Results but Cloud Miss and Weak Outlook Drive Stock Drop

 

Amazon's ($AMZN) Q4 earnings report came out Thursday afternoon, and while EPS and revenue both surpassed expectations, the stock dropped by about 4% in after-hours trading. Why? Let's break it down.

 

 

- Earnings per share (EPS) soared by 86%, hitting $1.86, compared to Wall Street's consensus of $1.49.

- Revenue for the quarter reached $187.8 billion, just above the expected $187.3 billion, reflecting a solid 10% year-over-year increase. 

 

 

 

But here's where it gets a little sticky. The cloud business, aka AWS (Amazon Web Services), is still the cash cow, but its growth slowed just a bit, clocking in at 19% growth (to $28.8 billion), a touch below the $28.9 billion forecast. AWS has an operating profit margin of 36.9%, which is massive compared to Amazon's overall 6.6% margin. Even though AWS only makes up 15% of Amazon's total revenue, it contributes more than half of its operating profit. So, any slowdown there is a big deal.

 

On the flip side, Amazon's advertising business continues to perform well, with an 18% increase in revenue to $17.3 billion, though it missed the target of $17.4 billion. But it's clear that both AWS and ads are Amazon's growth engines, and any hiccups there can spook investors. That's why the stock dropped about 4% in after-hours trading.

 

 

Now, looking ahead, Amazon's Q1 guidance was pretty disappointing. The midpoint revenue estimate is $153.3 billion, up 7% year-over-year, but analysts were expecting $158.6 billion. That's a nearly 3.3% miss on top-line expectations. Operating profit outlook for Q1 is also below estimates at $16 billion vs. $18.3 billion expected. Not exactly confidence-inspiring.

 

 

Furthermore, Amazon's spending on AI is massive, and it's only going up. The company plans to ramp up capital expenditures to around $105 billion in 2025, a 27% increase from 2024. That's on top of the $75 billion spent in 2024, primarily on AI infrastructure. CEO Andy Jassy addressed concerns about lower AI costs on the earnings call, arguing that while per-unit infrastructure costs may drop, companies will end up spending more overall as they build new AI-driven products.

 

But here's the kicker: DeepSeek, a Chinese startup, has developed an AI model similar to ChatGPT at a fraction of the cost. This could disrupt the AI arms race among U.S. tech giants. Some analysts, like those at Canaccord Genuity, think Amazon could actually benefit from lower AI costs in the long run, as its platform is designed to integrate open-source models. But for now, the uncertainty is adding pressure to an already jittery market.

 

 

Another wrinkle here is the recent tariff drama. President Trump's decision to impose a 10% tariff on China could weigh on Amazon, especially since a large chunk of their third-party seller services and ad revenue comes from China-based businesses. Add to that the ongoing global supply chain disruptions, and it's clear Amazon's ability to hit future revenue forecasts could face some headwinds.

 

 

In fact, Amazon isn't alone in facing cloud growth challenges. Microsoft's Azure growth slowed to 31% last quarter (from 33% in Q3), and Google's cloud revenue also missed estimates. Yet, BofA Securities analyst Justin Post remains bullish on Amazon, citing “robust cloud demand” and strong AI tailwinds into 2025. $MSFT $GOOGL 

 

I'm particularly curious about how the cloud competition shakes out in the coming year, especially with Microsoft's Azure and Google Cloud showing similar growth slowdowns. Will AWS bounce back, or are we seeing a shift in how businesses are approaching cloud services?

 

 

While Amazon's still a giant in the e-commerce and cloud spaces, the stock drop after these results shows that investors are really focused on growth right now. AWS, which has been the crown jewel, might not be growing as quickly as people had hoped. And as the company invests big in AI and faces potential cost pressures from tariffs and competition, the next few quarters will be crucial for determining whether Amazon can continue its growth trajectory or if this is just a temporary blip.

 

What do you all think? #amazon