Amazon’s Third Quarter Operating Income Guidance Conservative

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By Brian Nelson, CFA

Amazon (AMZN) reported better than expected second quarter results on July 31 that came in ahead of the consensus forecasts on both the top and bottom lines. Net sales increased 12%, excluding foreign exchange impacts, as North America segment sales increased 11%, international segment sales increased 11% (excluding foreign exchange), while AWS segment sales increased 17.5%, to $30.9 billion, the latter modestly better than expected. On a reported basis, net sales totaled $167.7 billion, beating the consensus forecast by nearly $5.6 billion.

Operating income increased to $19.2 billion in the second quarter compared to $14.7 billion in the second quarter of 2024, better than the company’s guidance range of $13-$17.5 billion and consensus of $16.9 billion–and led by AWS segment operating income of $10.2 billion (compared with $9.3 billion in the second quarter of 2024). Net income increased to $18.2 billion in the second quarter ($1.68 per diluted share), compared with $13.5 billion in the prior-year quarter ($1.26 per diluted share) and above the consensus forecast by $0.35.

Management had the following to say about the results:

Our conviction that AI will change every customer experience is starting to play out as we’ve expanded Alexa+ to millions of customers, continue to see our shopping agent used by many millions of customers, launched AI models like DeepFleet that optimize productivity paths for our 1M+ robots, made it much easier for software developers to write code with Kiro (our new agentic IDE), launched Strands to make it easier to build AI agents, and released Bedrock AgentCore to enable agents to be operated securely and scalably. Our AI progress across the board continues to improve our customer experiences, speed of innovation, operational efficiency, and business growth, and I’m excited for what lies ahead.

Though Amazon’s quarterly performance was well received, its third quarter outlook and cash flow trends left a lot to be desired. Third quarter net sales are expected to be between $174-$179.5 billion (versus consensus of $173.3 billion), or grow 10%-13%, incorporating a favorable impact of roughly 130 basis points from foreign exchange rates. Operating income guidance came in lower than consensus expectations, expected in the range of $15.5-$20.5 billion compared with $17.4 billion in the third quarter of 2024 and consensus of $19.4 billion.

Though Amazon’s operating cash flow has increased for the trailing twelve month period, free cash flow languished to $18.2 billion compared with $53 billion for the trailing twelve months ended June 30. Similar to its Magnificent 7 peers, Amazon is spending aggressively to capitalize on AI demand and to further grow its AWS business at a hefty pace. There were some soft spots in the quarter related to its third-quarter operating income guidance and free cash flow performance, but we expect Amazon to once again beat the range of its operating income guidance when it reports third quarter results. Free cash flow, however, will continue to be weighed down by robust capital spending.

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