Shares of Amazon.com Inc. took a beating in extended trading today, falling more than 7% after the company reported revenue that came in below expectations and followed with lower guidance for the current quarter.

The company reported second-quarter earnings before certain costs such as stock compensation of $1.26 per share, beating Wall Street’s consensus estimate of $1.03 per share, but revenue for the period rose just 10% from a year earlier, to $147.98 billion. That was notably lower than expected, with analysts looking for sales of $148.56 billion.

Net income doubled from a year earlier, to $13.5 billion, up from $6.75 billion, reflecting the success of mass cost-cutting efforts that were implemented last year.

Amazon’s cloud computing business, Amazon Web Services Inc., did just squeeze past analyst’s targets, reporting sales of $26.3 billion versus the $26 billion target. But the company’s online advertising business fell short of expectations, with sales there reaching $12.8 billion, short of the $13 billion target.

Making things worse, Amazon said it’s unlikely to be able to rectify the miss during the current quarter. For the third quarter, the company sees total revenue of between $154 billion and $158.5 billion, which would represent growth of 8% to 11% from the year prior. But the midpoint of that range, $156.25 billion, trailed Wall Street’s analyst consensus estimate of $158.24 billion.

In terms of profit, Amazon said it’s looking at third-quarter net income of $11.5 billion to $15 billion, which falls well short of the analyst target of a $15.3 billion profit.

Cloud benefits from AI chip demand

Once again, AWS delivered the most encouraging performance out of Amazon’s businesses, growing 19% from a year earlier. Investors will have noted that the business is growing more slowly than those of its main rivals in the cloud, Google LLC and Microsoft Corp. Those rivals both reported cloud growth of around 29% in their most recent financial reports, though it’s notable that their numbers are slightly different as they include other services besides public cloud infrastructure. Also, AWS’ cloud infrastructure business remains much larger than its two main rivals’.

In addition, the 19% growth topped Street expectations as well as the 17% it logged in the first quarter, and significantly higher than the year-ago growth rate of 12%.

Also, AWS did increase its revenue share, accounting for 17.8% of Amazon’s total, up from 17.5% three months earlier and just 16.5% in the second quarter of last year. The percentage has been climbing steadily ever since the COVID-19 pandemic, when cloud computing represented just 10% of Amazon’s total sales in the fourth quarter of 2020.

In a conference call with analysts, Amazon Chief Executive Andy Jassy (pictured) provided a few reasons to be optimistic about AWS, noting that most enterprise companies have completed their cost-cutting initiatives and are now focused on modernizing their technology infrastructures, which involves another shift from on-premises networking to the cloud. He insisted that AWS continues to be the “biggest beneficiary of that flip,” and added that he’s confident the “trend will continue” in coming quarters.

He also pointed to the “significant demand” the company is seeing for its new artificial intelligence chips, such as its Trainium2 processors. He said the company is focused on its own AI chips because of price, availability and demand in the industry. “We’ve heard loud and clear from customers that they relish better price-performance,” Jassy said. “It’s why we’ve invested in our own custom silicon, Trainium, for training, and Inferentia, for inference.”

Constellation Research Inc. analyst Holger Mueller told SiliconANGLE that AWS did well to grow 19% in the quarter, benefiting from the demand for AI. He said the growth was all the more remarkable as AWS didn’t increase its operating expenses, which remained more or less constant compared to the same period one year earlier. “Given the nature of the AWS business, this can only be achieved by consuming some of the over-investment it has made previously,” the analyst said. “As AWS invests the whole year to be ready for Black Friday, this will lead to some interesting questions about its investments in cloud capacity. In the third quarter, all eyes will be on the ratio of revenue growth to expenses.”

Jeffries analyst Brent Thill said in a note that the 19% growth of AWS was the third successive quarter of acceleration, and noted that its performance was the main reason why Amazon was able to beat expectations in terms of its overall operating income.

Sluggish ad sales and retail

Less encouraging was the state of Amazon’s advertising business, which saw revenue rise 20% during the quarter but fall shy of expectations. Amazon’s ad unit has been one of its biggest profit machines, and although the vast majority of ad sales come from sponsored product listings on its online store, it has added newer offerings and grown market share in the digital advertising industry at the expense of rivals Alphabet Inc. and Meta Platforms Inc.

However, it was Meta that delivered the strongest performance among online ad companies during the most recent quarter, with revenue growing 22%. Google’s ad business could only grow by 11%, while Snap Inc. said today that its ad sale revenues were up 16% from a year earlier.

What’s really holding back Amazon, though, is its core retail business, where it has struggled with sluggish growth amid strong competition from rivals such as the discount sites Temu and Shein, which enable Chinese merchants to sell directly to U.S. buyers.

Amazon revealed that its online sales grew by just 5% from a year earlier, while revenue from third-party seller services, including commissions, fulfillment and shipping fees rose 12%.

On a conference call with analysts, Amazon Chief Financial Officer Brian Olsavsky admitted that the company fell “a little short on revenue growth in North America versus our internal estimates.”

He said the miss was the result of consumers buying cheaper products where possible, leading to a lower average selling price than the company had expected. “What we’re seeing is really around ASP and lower ASP in products selected by customers,” Olsavsky explained. “They are continuing to be cautious in their spending and trading down to lower ASP products.”

With regard to the lower guidance, Olsavsky said that’s from the distraction of world events, which has made consumers act more cautiously. He cited events such as the ongoing Paris Olympics and the recent assassination attempt on Donald Trump in June, and said these have made the third quarter a “tough one to forecast.”

“No matter what you’re selling or providing to a customer base, customers only have so much attention and the things like the Olympics, although they don’t happen that often, we do see different traffic patterns around those events,” he told analysts. “When high-profile things happen or the assassination attempt a couple of weeks ago, you see that people shift their attention around news.”

Photo: SiliconANGLE