Earnings Review | Amazon's Post-Earnings Plunge Reflects Common Challenges of Cloud Service Providers

$Amazon.com(AMZN)$   's stock price plummeted after the release of its earnings report, primarily due to the announcement of high capital expenditures and the cloud business (AWS) operating income growth rate falling below 20%.

Core Financial Indicators

Amazon reported net sales of $213.4 billion for the fourth quarter, marking a 14% increase from $187.8 billion in the same period last year.

Operating income increased to $25.0 billion in the fourth quarter, compared with $21.2 billion in fourth quarter 2024.

Net income for the fourth quarter rose to $21.2 billion, or $1.95 per diluted share, compared to $20.0 billion, or $1.86 per diluted share, in the same quarter of the previous year. This represents a 6% increase in net income and a 4.8% increase in earnings per share year-over-year.

The company has guided that its total Capex for fiscal year 2026 will reach $200 billion, far exceeding the current Capex expectations of all other cloud giants. However, the market has moved past the stage of "rewarding" high capex and is increasingly concerned about the ROI of these investments and their potential erosion of profits. This was also the case earlier with Google and Microsoft.

Business Segment Overview

AWS sales grew to $35.6 billion, up 23.7% year-over-year. The segment's operating income rose to $12.5 billion, up from $10.6 billion in the fourth quarter of the previous year. This translates to a 17.9% year-over-year growth in operating income for AWS. This means AWS's profit margin is declining, as depreciation from increased capital expenditures is growing faster than revenue.

AWS's operating margn for the quarter was 35%, compared to 36.9% in the fourth quarter of the previous year.

North America sales reached $127.1 billion, up 10% year-over-year; operating income was $11.5 billion, compared with $9.3 billion in fourth quarter 2024, up by 23.7%. This demonstrates that Amazon's retail fundamentals are growing steadily, while the profit margin trend continues to improve.

The operating profit margin increased from 8.0% in the same period last year to 9.03%, surpassing analysts' expectations of 8.51%.

International sales hit $50.7 billion, up 17% (11% excluding foreign exchange effects); operating income was $1.0 billion, compared with $1.3 billion in fourth quarter 2024, down 23.1%.

In the retail business, advertising continues to play the role of Amazon's profit stabilizer.

Advertising services revenue in the fourth quarter reached $21.32 billion, a year-over-year increase of 23%, maintaining the high growth momentum of the past few quarters. Online retail revenue for the quarter was $82.99 billion, a year-over-year increase of about 10%, surpassing analysts' expectations of $82.3 billion.

Compared to the retail business, which is more sensitive to fulfillment, shipping capacity, and pricing strategies, advertising has a better gross profit structure and is more likely to contribute certain growth during macroeconomic fluctuations.

Earnings Guidance

Amazon forecasts its first quarter 2026 revenue to be between $173.5 billion and $178.5 billion, representing a year-over-year growth of 11% to 15%. The midpoint of this guidance range, $176 billion, roughly aligns with analysts' expectations of $175.54 billion. Even at the lower end of the range, Amazon is set to maintain double-digit revenue growth in the first quarter.

Operating income is expected to be $16.5–$21.5 billion, below the market expectation of $22 billion.

Summary

Overall, the earnings report was mixed. However, investors are growing increasingly frustrated with cloud service providers' heavy capital expenditures. The stock price plunged by 10% after the earnings release. 

– Valuation:

Amazon's PE ratio is currently 30.65 after the earnings release. 

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