Amazon Q2 FY2025 Earnings Review: Robust Cloud and AI Growth Coupled with Retail Tariff Challenges

TradingKey - Amazon.com, Inc. (NASDAQ: AMZN) released its Q2 FY2025 earnings on July 31, 2025, after market close,  delivering results that surpassed expectations, driven by robust growth in AWS, advertising, and retail segments. Although the stock initially rose slightly in after-hours trading, it later declined more than 6% reflecting investor caution over AWS competition and tariff-related margin pressures in retail.

Source: TradingKey

Key Financial Results

Source: Amazon, TradingKey

Guidance & Conference Call

· Q3 2025 Guidance: Amazon projects net sales of $174.0B–$179.5B, implying 10–13% YoY growth, with a favorable foreign exchange impact of ~130 basis points. Operating income is expected to be $15.5B–$20.5B, compared to $17.4B in Q3 2024, reflecting cautious optimism amid tariff uncertainties.

AWS revenue rose 17.5% to $30.9 billion, hitting a $123 billion annual run rate with a $195 billion backlog (+25% YoY). Growth was driven by strong demand for AI platforms like Bedrock and Nova. CEO called AI the biggest tech shift, emphasizing innovation and growth. Despite supply constraints easing slowly, Amazon’s $100 billion FY2025 CapEx focuses on AI infrastructure and data centers. AWS margins fell from 39.5% to 32.9% due to higher costs and heavy investment, raising near-term profit concerns amid tough competition. Q2 CapEx reached $31.4 billion, mainly for AWS and fulfillment expansion, causing free cash flow to drop 66% YoY to $18.2 billion. The large spending and mixed Q3 guidance, with a midpoint below some analyst expectations, added to market uncertainty.

Amazon’s North America and International segments, encompassing online stores, third-party seller services, and physical retail, account for roughly 60% of total revenue and grew about 11% YoY. Tariff-related cost inflation pressured margins, as reflected in the company’s cautious operating income guidance. To mitigate tariff impacts, Amazon employed pricing strategies, faster fulfillment, and expanded Same-Day/Next-Day delivery to over 4,000 U.S. cities. Management noted stable demand with no broad price hikes in H1 2025 but highlighted uncertainties ahead in H2 as pre-bought inventory runs down. These margin pressures and H2 risks have contributed to investor caution regarding sustainable retail profitability.

Advertising revenue increased 22% to $15.7 billion, fueled by Prime Video ads, sponsored products, and partnerships like Roku and Disney. While advertising remains a high-margin growth driver, it is sensitive to macroeconomic cycles and corporate budget volatility, making the sustainability of this growth uncertain and a key investor focus.

Conclusion

Amazon’s Q2 FY2025 results show strong growth driven by AI and AWS, with solid advertising performance supporting overall strength. The company’s investments in AI technology are improving operations and helping it lead the cloud market. However, rising costs from tariffs and trade issues are squeezing retail profits, and heavy spending is cutting into short-term cash flow, though these investments are important for long-term success. Looking ahead, the key factors to watch are how quickly Amazon can turn its AI efforts into profits, how supply issues improve, and if retail margins stabilize. These factors, including faster AI adoption and easing supply challenges, may drive Amazon’s stock to outperform its current valuation.

TradingKey - Amazon.com, Inc. (NASDAQ: AMZN) is scheduled to report its Q2 FY2025 earnings on Thursday, July 31, 2025, after the U.S. market closes. The earnings call will begin at 2:00 p.m. Pacific Time (5:00 p.m. Eastern Time).

Market Forecast

Source: Amazon Q1 FY2025 Earnings Release, Visible Alpha, Goldman Sachs, J.P. Morgan, Morgan Stanley, TradingKey

Where Investors Should Watch

AWS Growth and AI: AWS is expected to continue to be a pivotal growth driver, supported by its extensive cloud service portfolio and strong momentum in AI platforms like Bedrock and Amazon Q. Supply constraints for GPUs and server components may temper the onboarding of new AI workloads this quarter, so investors should watch for management’s updates on these supply-side challenges. Amazon’s aggressive $100 billion FY2025 capital expenditure plan, heavily focused on AI infrastructure and data center expansion, shows the strategic imperative to maintain AWS’s competitive edge. With Microsoft Azure and Google Cloud narrowing the gap, commentary on AWS’s market share dynamics and enterprise adoption of AI offerings will be critical.

Retail Segment and Tariff Pressures: The North America retail business, representing nearly 60% of total revenue, is projected to grow 8–10% YoY. However, tariff-related cost inflation poses risks to margins and pricing strategies. Amazon’s Q2 operating income guidance was below the street consensus, reflecting caution amid trade uncertainties. How Amazon manages pricing, fulfillment speed, and any shifts in consumer and seller behavior will be closely watched, especially given the potential impact of tariffs and broader macroeconomic pressures.

Advertising Momentum: Amazon’s advertising business is expected to remain a key profitability driver, driven by strong demand for Prime Video ads and sponsored product placements. This high-margin business is also subject to volatility linked to corporate advertising budgets and macroeconomic cycles. Management’s commentary on ad revenue trends and advertiser sentiment will be important indicators.

CapEx and Operational Efficiency: Amazon’s unprecedented $100 billion CapEx plan for FY2025 supports long-term growth areas including AI, Project Kuiper, and its fulfillment network overhaul. While such capital intensity has significantly pressured free cash flow, down nearly 50% in Q1 following an 80% CapEx surge, this level of investment is vital to maintain competitive leadership amid rapid industry innovation. It will be important to assess how management balances investment with operational efficiency, while continuously tracking progress in optimizing returns and controlling costs during this period of sustained capital spending.

Conclusion

For Amazon’s Q2 FY2025 earnings report, it is crucial to evaluate management’s commentary on AI monetization timelines, tariff mitigation strategies, and CapEx plan. Strong AWS and advertising results may support optimism, but tariff pressures and elevated investments could weigh on near-term margins. Maintaining exposure into the earnings release could be considered, but close attention should be paid to guidance indicating sustained retail margin pressure or AWS growth decelerating below 15%. Conversely, indications of easing AI hardware bottlenecks or strong enterprise AI adoption could suggest Amazon’s current ~36x forward P/E may be undervalued, supporting a positive view of its long-term growth prospects.

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