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Amazon’s Q4 earnings presented a complex picture, with positive earnings per share offset by concerns about cloud growth and future revenue projections. While the company exceeded expectations on earnings per share, reaching $1.86 compared to the anticipated $1.49, and revenue marginally surpassed forecasts at $187.8 billion, the performance of Amazon Web Services (AWS) raised concerns.
AWS Growth Slows, While Advertising Shows Promise
AWS, a significant profit driver for Amazon, experienced growth of 19%, generating $28.8 billion in revenue. This fell slightly short of the expected $28.9 billion. Given AWS’s high operating profit margin of 36.9%, compared to just 6.6% for the rest of Amazon, this slowdown is noteworthy. Although AWS constitutes only 15% of Amazon’s total revenue, it contributes over half of its operating profit. The company’s advertising business, another area of rapid growth, also narrowly missed expectations, with revenue of $17.3 billion, representing an 18% year-over-year increase.
Outlook and Capital Expenditures
Amazon’s revenue outlook for the first quarter disappointed investors, projecting $153.3 billion at the midpoint, a 7% increase from 2024, but significantly below the $158.6 billion analysts had predicted. The operating profit outlook also fell short, with a midpoint of $16.0 billion, compared to the expected $18.3 billion. Looking ahead to 2025, Amazon anticipates capital expenditures of approximately $105 billion, primarily focused on AI data center development. This represents a substantial 27% increase from 2024, which itself saw a 57% rise from the previous year.
The AI Landscape and DeepSeek R1
The emergence of DeepSeek R1, a potentially lower-cost AI model, was discussed during the earnings call. CEO Andy Jassy addressed concerns about potential revenue declines for AI cloud services, stating that while per-unit infrastructure costs may decrease, companies are likely to increase overall spending on technology as previously cost-prohibitive projects become feasible. This perspective suggests that advancements in AI technology, like DeepSeek R1, could ultimately benefit companies like Amazon by enabling broader AI integration and potentially improving margins in the long run.
Broader Tech Sector Trends and Tariffs
Amazon’s results arrive amidst a broader trend of fluctuating performance among tech giants. Microsoft reported a deceleration in Azure growth, and Alphabet’s cloud revenue also fell short of expectations. These results underscore the intense competition and evolving landscape of the cloud computing market. Furthermore, potential impacts of tariffs on Amazon’s revenue guidance remain a consideration. While tariffs on Canada and Mexico were paused, levies on China have taken effect, posing a potential risk given the significant role of China-based sellers in Amazon’s third-party marketplace.
Amazon’s Q4 results highlight the complexities facing the company. While earnings per share exceeded expectations, concerns about AWS growth and future revenue projections, coupled with significant AI investments and potential tariff implications, create a degree of uncertainty. The company’s strategic focus on AI and its ability to adapt to the evolving technological landscape will be crucial for its future performance.
