AMZN: Amazon (3)
Q2 2025 Update
The stock reacted negatively to the Q2 earnings by falling -8.3%. We suspect the focus was on the slower growth of AWS when compared to Microsoft and Google.
Microsoft’s Azure reported annual revenue run rate of $75b (+34% YOY).
Google Cloud reported Q2 revenue of $13.6b (+32% YOY).
AWS revenues grew just +17.5%. The market was disappointed despite:
1. AWS still being the largest cloud platform by a wide margin.
2. AWS backlog grew +25% to $195b, a clear indicator of sustained long-term demand.
We think the Q2 report was quite good and the market overreacted. Let’s break down the reasons…
Overall Revenues & Operating Income
Q2 revenue reached $167.7b (+12% YOY constant FX), exceeding their guidance upper range of $164b, as well as analysts’ expectations of $162b. This comes after Q1, where revenues grew +9% YOY.
Operating income grew to $19.2b (+31% YOY), also above guidance upper range of $17.5b.
By Segment
Revenues across all segments grew quite nicely (YOY):
Online stores: $61.5b, +11%
Physical stores: $5.6b, +7%
3P sellers services: $40.3b, +11%
Advertising: $15.7b, +23%
Subscriptions: $12.2b, 12%
Others: $1.5b, +19%
AWS: $30.9b, +17.5%
On operating income:
North America: $7.5b, +48%
International: $1.5b, +448%
AWS: $10.2b, +9%
The obvious outlier is AWS, which grew revenue +17.5%, yet operating income grew by +9% only. AWS operating margins fell from 39.5% in Q1 to 32.9% in Q2.
This is due to higher depreciation from CAPEX and a seasonal step-up in stock-based compensation.
This is not unexpected. As a reminder:
1. CAPEX last year was $83b, the majority of which went towards AWS.
2. AWS decreased the useful life of older servers and networking items from 6 to 5 years effective in 2025.
Obviously, depreciation will increase significantly right after such major investments. And since AMZN is still reinvesting heavily, we should expect continuous margin pressure.
Since day one, AMZN never cared about short-term margins, what they pursue are long-term cash flows.
We think the important statistic is that backlog grew +25% YOY to $195b because this is a sign of strong demand. CEO Andy Jassy emphasized that 85-90% of IT spend is still on-premises versus on the cloud:
In the next ten to fifteen years, that equation is going to flip, further accelerated by companies’ excitement for leveraging AI. So AWS has significantly broader functionality, stronger security and operational performance, and much deeper experience helping enterprises modernize their infrastructure bodes well for the AWS business moving forward.
Non-AWS Segments
On the non-AWS side, North America operating margins increased YOY from 5.6% to 7.5%. International segment is also turning increasingly efficient, margins were 4.1%, up from 0.9% last year.
At AMZN’s scale, a +1% in margins translates to a few billions of annual cash flows.
The international segment consists of two main pieces:
1. Established markets like the UK, Germany, and Japan, with similar margin profiles to the US.
2. Newer markets. AMZN entered 8 new countries over the past 5 years, which are all at different points in terms of profitability. (Australia 2017, Columbia & Argentina 2018, UAE 2019, Saudi 2020, Belgium 2022, Eastern Europe 2023, South Africa 2024)
E-commerce
Profitero ranked Amazon as the lowest priced retailer in the US for the consecutive eight years.
Significant efficiency improvements were reported:
40% increase in orders moved via direct routes (fewer stops).
12% reduction in package travel distance.
15% reduction in handling touched per unit.
A key part of this increased efficiency and productivity comes from improving warehouse logistics and robotics automation. In fact, AMZN has deployed over 1 million robots this quarter!
It also launched Deepfleet, an AI traffic management system to coordinate robot movements to find optimal paths and reduce bottlenecks.
Advertising
In Q2, the advertising segment grew +23% YOY to $15.7b, that’s after +19% growth last quarter!
AMZN advertises across its entire ecosystem: Amazon marketplace, Prime Video, Twitch, Fire TV, and now also live sports (NFL, NASCAR, NBA).
In June, AMZN announced a partnership with Roku, which will give advertisers access to 80 million connected TV households.
This impressive growth is a big part of profitability because the incremental cost on advertising on their own platforms is virtually zero.
Project Kuiper
Project Kuiper is AMZN’s satellite broadband network, which will provide high-speed internet access globally. This is not commercially launched yet. The biggest competitor is Elon Musk’s Starlink.
There are advantages to Project Kuiper because the end users are consumers, enterprises, and governments, all of which AMZN has very strong relationships given their consumer businesses and AWS.
What enterprises and governments want to do when they take data down from satellites is put it into the cloud to run analytics and operations. The fact that Kuiper and AWS are connected is a very attractive value proposition.
Free cashflow (FCF)
FCF for Q2 was only $332m, this is due to reinvestment and not a lack of profitability. TTM FCF was $18b, very much lower than $53b last year. TTM operating cashflow, however, reached $121b, +12% YOY.
Guidance
Revenue: $174b to $179.5b, implying 10% to 13% growth.
Operating income: $15.5b to $20.5b ($17.4b in Q3 2024)
The operating income guidance is on the low side likely because of depreciation expenses.
We actually don’t have a quantifiable way to estimate if these investments will yield results quickly. That’s the objective of being an investor; we want our returns to be certain and soon. The key here is that we have to trust AMZN management that the return on invested capital will exceed the cost.