Amazon cloud computing results fail to impress, shares dive

By Deborah Mary Sophia and Greg Bensinger

July 31 (Reuters) - Amazon.com AMZN.O on Thursday forecast third-quarter sales above market estimates, but failed to live up to lofty expectations for its Amazon Web Services cloud computing unit after rivals handily beat Wall Street forecasts.

Shares plunged by more than 7% after-hours. Before releasing the results, Amazon had finished regular trading up 1.7% to $234.11.

Both Google-parent Alphabet GOOGL.O and Microsoft MSFT.O posted big cloud computing revenue gains this month.

AWS profit margins also contracted. Amazon said they were 32.9% in the second quarter, down from 39.5% in this year's first quarter and 35.5% a year ago. The second-quarter margin results were at their lowest level since the final quarter of 2023.

"AWS is their growth engine and to see that drop in margin is dropping the stock," said Ken Mahoney, CEO of Mahoney Asset Management. "The market was looking for further fireworks to take this up back to new highs and beyond."

AWS reported a 17.5% increase in revenue to $30.9 billion, edging past expectations of $30.77 billion. By comparison, sales for Microsoft's Azure rose 39% and Google Cloud gained 32%.

Amazon expects total net sales to be between $174.0 billion and $179.5 billion in the third quarter, compared with analysts' average estimate of $173.08 billion, according to data compiled by LSEG. The range for operating income in the current quarter was also light. Amazon forecast between $15.5 billion and $20.5 billion, compared with expectations of $19.45 billion.

Both Microsoft and Alphabet cited massive demand for their cloud computing services to boost their already huge capital spending, but also noted they still faced capacity constraints that limited their ability to meet demand.

AWS represents a small part of Amazon's total revenue, but it is a key driver of profits, typically accounting for about 60% of Amazon's overall operating income.

While Amazon has poured billions of dollars into AI infrastructure, analysts have said the lack of a strong AI model from AWS is causing concerns that the company could be trailing rivals in AI development.

The AWS results are "alarming," said Dave Wagner, portfolio manager for Aptus Capital Advisers, which holds Amazon shares. "Amazon is an operating leverage story and they had to be able to grow, at least relative to costs. And they haven't done it.

The largest tech companies have been boosting capital expenditures to add more data center capacity, particularly for artificial intelligence software deployment and development. Amazon said it expected second-half spending roughly the same as its second quarter total of $31.4 billion, suggesting it would spend around $118 billion for the full year. Analysts had projected about $100 billion.

On Wednesday, Microsoft said it would spend a record $30 billion in the current quarter. Google-parent Alphabet raised its spending forecast by $10 billion to $85 billion for the year.

Seattle-based Amazon posted online store sales of $61.5 billion, an 11% gain. Advertising sales, a fast-growing segment for Amazon, were up 23% to $15.7 billion.

Investors have been watching Amazon's e-commerce unit for any signs that tariff-related uncertainty has dashed consumer confidence. U.S. data showed consumer spending rose moderately in June.

CEO Andy Jassy, in a call with analysts, addressed concerns about the impacts of tariffs on Amazon's core retail business.

"Through the first half of the year, we haven't yet seen diminishing demand nor prices meaningfully appreciating," he said on a call with analysts. "We also have such diversity of sellers in our marketplace, over 2 million sellers in total, with differing strategies of whether to pass on higher costs to consumers."

He added: "We just don't know what's going to happen moving forward. It's hard to know where the tariffs are going to settle, particularly in China."

President Donald Trump's tariffs have major retailers and consumer goods companies scrambling to protect margins while trying not to hurt consumer demand.

Trump has said the levies will bring manufacturing power and jobs back to the U.S.

Analysts had said Amazon's focus on low prices, quick delivery and its many product categories helped cement its position as the No. 1 e-commerce retailer for U.S. consumers, giving it an edge over rivals.

Amazon has said it was pushing suppliers to pull forward inventories to ensure supply and keep prices as low as possible. Still, prices for goods made in China and sold on Amazon.com have been rising faster than overall inflation, Reuters reported last month.

Amazon has been trimming jobs, including at its AWS, books, devices and podcasting units. Headcount fell by 14,000 workers from this year's first quarter, bringing the total to 1.46 million, the first decline since the beginning of 2024.