Amazon Q3 earnings updates: Analysts expect answers on AI progress and AWS as AMZN lags other Mag 7 stocks
News Summary
Amazon is approaching its latest earnings report as the lagging performer among the "Magnificent Seven" stocks this year, with investors seeking key updates to spark new momentum. Specifically, Wall Street is keen to understand its AI ambitions and how it plans to compete against formidable rivals like Microsoft and Alphabet. AWS growth, retail margins, and the impact of tariffs are also on investors' radar. JPMorgan analysts, while acknowledging Amazon's strong execution in retail sales and margin expansion, expressed concerns about its positioning and strategy in the generative AI space, noting a gap in growth relative to Azure/Google Cloud and questioning the trajectory of 2H AWS growth. They also highlighted the potential impact of tariffs and changes to de minimis exemptions on demand and operating margins. However, JPMorgan anticipates continued AWS growth acceleration and views the easing of AI supply chain gaps as bullish for Amazon. BofA analysts are upbeat, projecting potential operating income upside, estimating a 4% beat on GAAP operating profit at $20.4 billion against the Street's $19.7 billion, driven by healthy retail sales, strong online advertising, and AWS layoffs in July.
Background
Amazon is one of the world's largest e-commerce and cloud computing companies, and a component of the "Magnificent Seven" technology stocks in the US market, which are closely watched for their significant market capitalization and growth potential. However, over the past five years, Amazon's stock performance has notably lagged behind other "Magnificent Seven" peers such as Meta, Alphabet, and Nvidia, delivering significantly lower returns compared to these companies. Currently, the global technology sector is undergoing a profound transformation driven by generative artificial intelligence (GenAI), leading to high market expectations for tech giants' strategies and execution in this domain. The previous Trump administration implemented various tariff policies aimed at protecting domestic industries, and these policies, along with their subsequent effects, including adjustments to the "de minimis exemption," continue to impact multinational corporations' supply chains, cost structures, and international trade. These macroeconomic and geopolitical factors form the complex backdrop for Amazon's current earnings season.
In-Depth AI Insights
Is Amazon's perceived 'lag' in generative AI a strategic weakness or a market misperception? - JPMorgan's concerns are not unfounded; Microsoft and Google have indeed been more aggressive in their early GenAI deployments, and their cloud services (Azure and Google Cloud) show faster growth momentum in AI-related workloads. While Amazon's AWS is a cloud infrastructure behemoth, its public progress in AI application layers and model development has been relatively conservative, potentially reflecting a focus on foundational compute power rather than direct application-level competition. - However, this 'lag' could be superficial. As a massive owner of data and computing capabilities, Amazon's AI investments may be deep and long-term, rather than pursuing short-term market hype. Its in-house AI chips and investments in companies like Anthropic signal long-term ambitions. The market might be underestimating its vast potential in enterprise-grade GenAI solutions and internal retail/logistics optimization. - From an investment perspective, if the market has already priced in this 'lag,' a clear demonstration of Amazon's GenAI strategy or significant breakthroughs could lead to a substantial re-rating of its stock. How will tariff policies and supply chain optimization impact the long-term profitability of AWS and retail operations? - The Trump administration's tariff policies, particularly adjustments to the 'de minimis exemption,' impose ongoing cost pressures on Amazon's international retail business, especially for third-party sellers importing from China. This directly impacts retail margins and consumer demand, particularly in price-sensitive markets. Amazon may have to absorb higher costs or raise prices, both of which would suppress profitability. - For AWS, while benefiting from easing AI supply chain constraints, escalating global trade tensions could indirectly affect its hardware procurement costs and international cooperation for data center construction, thereby impacting its cost structure for delivering AI services. While easing supply chain bottlenecks are a short-term positive, long-term geopolitical risks remain a factor. - Internal AWS layoffs and retail efficiency improvements are proactive measures to address macroeconomic pressures and optimize cost structures. However, the long-term effectiveness of these measures depends on whether they can achieve cost savings without sacrificing innovation and growth. What disconnect exists between analyst optimism and lagging stock performance, and what does it signify? - Despite JPMorgan and BofA maintaining Buy or Overweight ratings with price targets above current levels, Amazon's stock has been the worst performer among the 'Magnificent Seven' over the past five years. This disconnect might suggest deeper market skepticism regarding Amazon's long-term growth story, particularly its AI vision, or a belief that its value is not yet fully realized compared to other giants. - This divergence could stem from differing risk assessments. Analysts might prioritize fundamental improvements (e.g., retail margins, AWS acceleration), while the broader market might assign higher weight to GenAI competition, regulatory risks, and macroeconomic uncertainties. For investors, this could represent an opportunity to await catalysts, specifically Amazon's clear articulation of its GenAI strategy and profitability. - Furthermore, the lagging performance may reflect growth inertia due to Amazon's immense scale. Compared to companies more singularly focused on specific high-growth areas (like Nvidia), Amazon's diversified business might dilute the explosive impact from any single hot area (like AI), leading the market to adopt a more cautious stance on its overall growth potential.