Ahead of Amazon‘s (AMZN -1.95%) first-quarter earnings report, there was certainly some angst among investors. This was understandable, as both tariffs and a weaker economy could negatively impact the company’s e-commerce operations.
Ahead of its report, one Wall Street analyst said that Amazon would have to “eat price” or lose market share. With the company forecasting sales in line with Wall Street estimates but operating income well below, it appears Amazon is willing to indeed eat some price. It stated that there was never a more important time to keep prices low.
That said, Amazon highlighted that besides itself, it also has a diverse third-party seller base that can offer items across price points. It has also taken some proactive measures by stockpiling inventory ahead of the tariffs. Ultimately, Amazon said it is planning for various economic conditions while focusing on what it can control to protect the customer experience.
Image source: Amazon.
But as the company noted, it is “not uniquely susceptible” to tariffs. Every broad-based, general merchandise retailer will see the same pressure. Meanwhile, the tariff fiasco will eventually go away, or consumers will adapt — there isn’t any other option over the long term. By helping keep prices low and focusing on rapid delivery and the customer experience, Amazon will continue to take retail share over the long run.
AWS is still its biggest growth driver
While a lot of the attention surrounding Amazon recently has been on its e-commerce business due to tariffs, its cloud computing business Amazon Web Services (AWS) is still its largest segment by profitability and its fastest-growing. In the quarter, the segment grew its revenue by 17% to $29.3 billion, while operating income jumped 22% to $11.5 billion. However, AWS revenue fell just short of the $29.42 billion expected by analysts, as compiled by StreetAccount.
Amazon is investing heavily to build out its data center infrastructure to keep up with rising AI demand, but the company also feels that there is a huge opportunity left to shift companies from on-premise solutions to the cloud. It noted that 85% of global IT spend is still on premises, but it expects that spending to flip to the cloud over the next 10 to 20 years.
Meanwhile, Amazon continues to tout its custom AI chips, noting that its Trainium 2 chips offer a 30% to 40% better price performance than similar graphics processing units. However, the company also noted that it is committed to giving customers the option of multiple chip providers.
On the consumer side of its business, Amazon’s North American sales increased 8% to $92.9 billion, while international sales rose 5%, or 8% in constant currencies, to $33.5 billion. Operating income for its North American segment jumped 16% to $5 billion, while its international segment posted operating income of $1 billion versus $0.9 billion a year ago.
Advertising services continue to be a bright spot for Amazon, with revenue climbing 19% to $13.92 billion. That was ahead of the $13.74 billion analyst consensus, as compiled by StreetAccount. The company said its full-funnel ads are catching on, with brands liking how well they help them reach and connect with customers. Ads are a higher-margin business, which has been helping the company grow operating income in its e-commerce segments more quickly than revenue.
Third-party seller services revenue increased by 7% to $36.5 billion, while online store revenue rose by 6% to $57.4 billion. Physical stores, such as Whole Foods and Amazon Fresh, saw sales grow by 5% to $5.5 billion. Subscription services revenue, meanwhile, climbed 11% to $11.7 billion.
Overall, Amazon’s revenue rose by 9% to $155.7 billion, which came in just ahead of the $155 billion analyst consensus, as compiled by LSEG. Adjusted earnings per share soared 62% to $1.59 and came in well ahead of analyst expectations of $1.36.
Amazon generated $113.9 billion in operating cash flow for the quarter and $25.9 billion in free cash flow. This shows that despite its aggressive AI infrastructure spending it still has plenty of cash left over.
Looking ahead, it forecast Q1 revenue to be between $159 billion and $164 billion, representing 7% to 11% growth. Meanwhile, it guided for operating income to be in a range of $13 billion to $17.5 billion versus $14.7 billion a year ago. Analysts were looking for operating income of $17.6 billion (StreetAccount) on revenue of $160.9 billion (LSEG).
Image source: Getty Images.Â
Time to buy the stock
Amazon has been around for a long time and has navigated various economic environments. While tariffs and the economy could negatively impact its results in the short term, it will not change the company’s long-term growth trajectory.
Its e-commerce business continues to grow, but more importantly, the company continues to drive efficiencies in its business through AI, which helps drive operating leverage and make it more profitable. In addition, it has been able to become one of the world’s largest digital advertising platforms, which helps provide a nicely growing stream of high-margin revenue.
AWS, though, is its biggest growth driver, and this business looks like it continues to have a long runway of growth in front of it due to AI and the continual shift from on-premise to the cloud. With its own custom AI chips, the company also has a cost advantage.
Trading at a forward price-to-earnings (P/E) ratio of about 25 times 2025 analyst estimates, the stock is still trading at one of the most attractive valuations in its history. That makes this a great time to pick up shares in this long-term winner.
