Amazon earnings results: Shoppers are being cautious with their spending, the company warned. Its stock dropped sharply.

AWS is a bright spot, but cautious shoppers could be a dark cloud

After a quarter that largely missed expectations and saw its stock dive in after-hours trading, Amazon Web Services still remains a bright spot for the company.

With so many companies looking to expand their generative AI capacities, there's a lot of growth in store for AWS data centers and even Amazon's own chips, executives said on a call with analysts after the company reported earnings.

But taking advantage of all that demand comes with a price.

Amazon has to build those data centers and make other investments to actually give its customers what they want, CFO Brian Olsavsky said.

Amazon also cautioned that shoppers are looking for good deals on its website, the latest sign that consumers are watching their spending more closely than they have in the last few years.

The company flagged that people are trading down to lower-priced items when possible.

Tired of stuff being locked up at the drugstore? Amazon has a solution.

Amazon's Pharmacy business is gaining traction with customers, CEO Andy Jassy said.

Part of the reason: People don't always want to stop into the drugstore down the block in cities, particularly when things like over-the-counter medicines and other products are locked up on the shelf and they have to get an employee to help them.

"If you walk into pharmacies in cities, it's a pretty tough experience," he said.

Many retailers, including Target, Rite Aid, and CVS, have locked up merchandise in an attempt to reduce shoplifting.

Jassy touts some of Amazon's latest AI tools

As the post-earnings investor call kicks off, Jassy highlights some of the biggest AI uses that Amazon has rolled out recently.

Already in 2024, Amazon has debuted an AI chatbot called Rufus that helps customers find products for sale on its website.

There's also a function to make sure you're ordering clothes that will actually fit you and a search function that can make TV and movie recommendations on Fire TV.

Amazon Web Services is seeing more demand —but there's a cost

Amazon Web Services, or AWS, saw sales jump 19% to $26.3 billion and operating income close to double over last year's second quarter.

That demand is great, but Olsavsky pointed out on a call with the press that AWS's profit margins will likely shift as it spends money to increase capacity, especially as customers demand AI-driven tech.

"As we've long said, we expect AWS operating margins to fluctuate over time, driven in part by the level of investments we're making at any point in time," he said.

Amazon customers are 'looking for deals'

Amazon shoppers are trading down to lower-priced products, Olsavsky said on a call with reporters after the company released its earnings results

"We are seeing cautious consumers, they're looking for deals," he said.

Amazon is also leaning into sales of sunscreen, cleaning wipes, and a lot of other household goods with its Everyday Essentials business.

Most of those products are lower cost than other things Amazon sells, which is weighing on sales figures.

He also cautions that the third quarter will be "a tough quarter to forecast" revenue given that consumers' attention will be elsewhere, particularly with the Olympics in Paris and a stream of news about the US presidential election.

Investors will want to hear about Prime Day sales

Amazon executives will almost certainly talk about Prime Day results, which the company said was its "biggest Prime Day shopping event yet," though we don't know many of the specifics yet.

Last year, Prime Day shoppers bought more than 375 million items and saved more than $2.5 billion, according to the company — though that event was just one day as opposed to this year's two.

Amazon customers are looking for bargains — eyes on its Temu-like competitor

Here's an early take on Amazon's earnings from Emarketer principal analyst Sky Canaves at BI's sister company:

"Amazon's topline growth came in short on softer consumer spending in a quarter sandwiched between two major sales events — the Big Spring Sale in March and Prime Day in July.

However, healthy consumer spending during these events indicates more strategic and deal-hunting shopping behavior.

Amazon will have to position its offerings and promotions to take advantage of these trends, such as with the reported plans to launch a Temu-like discount section in time for the holidays this year."

Amazon could be seeing signs of its customers buying less given its disappointing guidance

Amazon is forecasting results for next quarter below Wall Street's expectations.

That is likely to prompt questions on the investor call, which CEO Jassy will have to address — including ones about whether shoppers are pulling back.

Several companies have already warned that consumers aren't buying as much as they were earlier this year. Fast-food chains like McDonald's and Burger King are offering value meals just to get diners back into restaurants, for instance.

Other companies, like Whirlpool and Southwest, have said that bigger-ticket items like appliances and airline tickets for vacations aren't selling like they used to.

Amazon misses 2nd-quarter sales forecast, 3rd-quarter guidance comes in light

Second quarter

• Net sales: $147.98 billion, +10% y/y, estimate $148.78 billion

  • Online stores net sales: $55.39 billion, +4.6% y/y, estimate $55.55 billion
  • Physical Stores net sales: $5.21 billion, +3.6% y/y, estimate $5.26 billion
  • Third-Party Seller Services net sales: $36.20 billion, +12% y/y, estimate $36.65 billion
  • AWS net sales: $26.28 billion, +19% y/y, estimate $25.98 billion
  • North America net sales: $90.03 billion, +9.1% y/y, estimate $89.98 billion
  • International net sales: $31.66 billion, +6.6% y/y, estimate $32.87 billion
• Third-party seller services net sales excluding F/X: +13% vs. +18% y/y, estimate +13.4%
• Amazon Web Services net sales excluding F/X: +19% vs. +12% y/y, estimate +17.2%
• EPS: $1.26 vs. 98c q/q, estimate $1.04

• Operating income: $14.67 billion, +91% y/y, estimate $13.59 billion

  • Operating margin: 9.9% vs. 5.7% y/y, estimate 9.13%
  • North America operating margin: +5.6% vs. +3.9% y/y, estimate +5.78%
  • International operating margin: 0.9% vs. -3% y/y, estimate 0.31%
• Fulfillment expense: $23.57 billion, +11% y/y, estimate $22.96 billion
• Seller unit mix: 61% vs. 60% y/y, estimate 60.7%

Third quarter

• Operating income: $11.5 billion to $15.0 billion, estimate $15.66 billion
• Net sales: $154.0 billion to $158.5 billion, estimate $158.43 billion

Source: Bloomberg

Bank of America: Amazon's retail unit is gaining share

Bank of America expects Amazon to produce a solid earnings report on Thursday, with the bank expecting both a revenue and income beat, as well as faster-than-expected growth in its AWS cloud unit.

"Given beat in 1Q, new third-party fees, Prime ad ramp and limited fulfilment center square foot growth, we expect upside toward buyside expectations," Bank of America said in a recent note.

The bank said the biggest risk for Amazon is its third-quarter profit margin guidance because Wall Street already has high expectations, and higher freight costs could serve as a headwind.

While the US consumer is showing signs of softening, the bank expects Amazon's retail unit to be a beneficiary from the current economic environment.

JPMorgan: 'Expect AWS acceleration'

JPMorgan said in a recent note that investor discussions reveal the top areas of focus to be the potential for accelerated growth in Amazon's AWS cloud unit.

"Investor discussions focused on AWS acceleration, GenAI positioning, pace of North America OI margin expansion, health of the consumer, and magnitude of FCF and potential capital returns," JPMorgan said.

The bank, which calls Amazon a "Best Idea," said investors are looking for Amazon to deliver between $148 billion and $150 billion in revenue, and AWS unit growth of 17% to 18% in the second quarter.

"We expect AWS acceleration and solid Stores growth, North America and International OI margin expansion, and improved cost discipline to support multi-year FCF ramp," JPMorgan said.

Goldman Sachs: 3 key things to watch for in Amazon's Q2 earnings

Goldman is watching three different investor debates:

1. "The overall health of the consumer — Amazon's eCommerce business appears to have remained strong in Q2 based on a host of industry checks and data points intra quarter."
2. "The ability of Amazon to continue to produce Operating Income margin upside — a topic we delve into greater detail in the note and still see the potential for outperformance in 2025 driven by higher retail margins and a stronger contribution of advertising — we also maintain a positive long-term view on Intl margins and expect AWS profitability to remain robust."
3. "The trajectory of AWS revenue growth, where we continue to expect reacceleration through 2024 as prior headwinds around optimization and workload migration turn into tailwinds and AI workloads are a rising tailwind."

Bloomberg Intelligence: 'Double-digit sales gains may stay intact'

Analysts at Bloomberg Intelligence expects Amazon's second-quarter sales to rise towards the high end of its 7% to 11% guidance range thanks to strong e-commerce sales, ongoing advertising gains and continued growth in Amazon's AWS cloud division.

"AWS sales, in constant currency, may meet consensus' high-teens view," Bloomberg Intelligence said.

Amazon should also see some solid growth in its retail division, according to the note.

"On the retail side, the company's personal-shopping assistant Rufus and other gen-AI enhancements, coupled with third-party sales outpacing first party, are catalysts," Bloomberg Intelligence said.

Citi: 'Improving AWS demand and expanding profitability'

Citi said Amazon is set to benefit from multiple tailwinds as demand for its AWS cloud services improves and it expands its profitability.

"Given GenAI tailwinds we believe AWS revenue growth likely accelerated in 2Q and based on improving efficiencies across Retail along with continued strong advertising demand, we believe OI is likely to be above the high-end of guidance," Citi said in a recent note.

The bank said that while there are signs of a "more challenged" low-end consumer, Amazon's delivery improvements should result in solid retail sales.

"Faster delivery has improved conversion rates and our analysis of Prime Day suggests another successful event," Citi said.

Amazon's consensus second-quarter net sales estimate is $148.78 billion.

Second quarter

• Net sales estimate: $148.78 billion

  • Online stores net sales estimate: $55.54 billion
  • Physical Stores net sales estimate: $5.26 billion
  • Third-Party Seller Services net sales estimate: $36.66 billion
  • Subscription Services net sales estimate: $10.93 billion
  • AWS net sales estimate: $25.98 billion
  • North America net sales estimate: $89.98 billion
  • International net sales estimate: $32.87 billion
• Third-party seller services net sales excluding F/X estimate: +13.4%
• Subscription services net sales excluding F/X estimate: +10.5%
• Amazon Web Services net sales excluding F/X estimate: +17.2%
• EPS estimate: $1.04

• Operating income estimate: $13.59 billion

  • Operating margin estimate: 9.13%
  • North America operating margin estimate: +5.78%
  • International operating margin estimate: 0.31%
• Fulfillment expense estimate: $22.96 billion
• Seller unit mix estimate: 60.3%

Third quarter

• Net sales estimate: $158.43 billion
• Operating income estimate: $15.66 billion

Source: Bloomberg