Amazon Q1 Earnings Update!
Exploding AI Capex, while AWS and Advertising show strength!
The first quarter of 2025 has been quite volatile for the markets, and Amazon is no different!
After the madness of the “Liberation Day” tariffs, the stock fell 13% in just a few days, but has since recovered as some tariffs were postponed and additional exceptions were announced.
Overall, Amazon’s stock has fallen 20% since February, when Trump started his Trade War with his North American neighbors, Mexico and Canada, as investors continue to reassess how trade tensions will affect the company.
In Q1 2025, Amazon’s revenue grew by 8.6% to $155.7B, whilst EBIT grew 20.2% to $18.4B and net income grew 64.2% to $17.1B.
However, investors were not reassured by this earnings report, so the stock went down 3.2%!
In this article, I will look at Amazon’s Q1 2025 results, if you want a more detailed analysis of the business, read my Amazon Investment Case!
Let’s look into the report and see what investors didn’t like!
1. Online and Physical Stores
2. 3P Services
3. Advertising
4. Subscriptions
5. AWS
6. Consolidated Financials
7. Valuation
8. Conclusion
1. Online and Physical Stores
Under these segments, Amazon reports its direct, first-party sales on Amazon.com and physical sales from Whole Foods, Amazon Go, and other brick-and-mortar stores.
While large in terms of revenue, these 2 segments don’t contribute much to the profitability of the company and are slow growers.
Revenue from online stores grew 5% Y/Y to $57.4B. FX-neutral (FXN) growth was 6%. This was a deceleration from 8% in Q4 and 7% in Q2024!
Meanwhile, Whole Foods and others made $5.3B, up 6% Y/Y. This growth was in line with the previous quarters.
These 2 segments will get directly hit by tariffs, as they will significantly increase the cost of goods sold for Amazon.
Key points from the call:
“When you have the broadest selection like we do and 2,000,000 plus global sellers like we do, you're better positioned to help customers find whatever items matter to them at lower price points than elsewhere. Finally, when there are uncertain environments, customers tend to choose the provider they trust most.
Given our really broad selection, low pricing, and speedy delivery, we have emerged from these uncertain areas with more relative market segment share than we started and better set up for the future.” Amazon Q1 2025 Earnings Call
People trust Amazon and will spend their money on the platform, whether the products are made in China or elsewhere.
2. 3P Services
The 3P Services segment encompasses all logistics, sales, and other platform fees Amazon charges merchants.
Amazon made $36.5B in 3P service fees from sales on its platform, an increase of 5.5% Y/Y and 7% FXN!
In the above chart, we see that this was the slowest-growing quarter since COVID. This slowdown is quite noticeable, especially when compared to the 16% growth in Q1 of 2024.
Amazon charges merchants a few % listing fee for using the Amazon.com platform, if tariffs increase prices, Amazon’s absolute dollar revenue per sale increases. However, if tariffs cause an overall slowdown in spending, then Amazon’s total revenue could suffer.
Additionally, in logistics, Amazon charges merchants per package, so if tariffs are causing fewer orders, logistics revenue will decrease.
However, I believe analysts and some investors are too preoccupied with worrying about this quarter's EPS, or how tariffs might reduce GMV growth by 2%, or whatnot.
Meanwhile, Amazon is investing billions of dollars to expand its logistics network!
The company just announced 200 new delivery stations that will create 100K logistics jobs in rural America! While other companies think about today, Amazon plans for the next decade and will continue strengthening its logistics moat!
Key points from the call:
“We've shared many times that an important turning point was regionalizing our national fulfillment network into regional hubs. By stocking items closer to where customers live, we're able to deliver more orders faster, often in fewer packages and at lower delivery costs.”Amazon Q1 2025 Earnings Call
3. Advertising
Advertising is Amazon’s new cash-cow and soon to be a $100B a year business. Apart from the regular banner ads on Amazon.com and sponsored search results, Amazon is now actively adding advertisements on Prime Video and Twitch.
In Q1 2025, this segment made $13.9B for the company, an increase of 17.8% Y/Y!
In the chart above, we see that this segment continues to grow at a healthy pace, and the growth hasn’t materially decreased compared to the last 4 quarters.
Q1 growth of 17.8% was about the same as the 18% and 19% in Q4 and Q3 of 2024.
Some Wall Street analysts have raised concerns that Trump’s Trade War with China might severely damage this segment. It is estimated that 28% of Amazon’s GMV comes from China-based sellers who represent a reported 50% of the top 10,000 merchants on Amazon.
If these sellers are unable to sell on Amazon, they will stop advertising. However, I believe this risk is exaggerated.
As Chinese products become more expensive, demand for alternative products made elsewhere will increase, and those sellers will increase advertising to capture a larger share of this demand.
Additionally, Amazon is still ramping up Prime Video ads, so growth there will cover some of the weakness from Chinese sellers.
Key points from the call:
“We're seeing strength across our broad portfolio of full funnel advertising offerings that help advertisers reach an average ad supported audience of more than 275,000,000 in The US alone.” Amazon Q1 2025 Earnings Call
Amazon controls access to 275M high-intent shoppers in the US, a very appealing proposition to advertisers.
4. Subscriptions
Amazon hasn’t disclosed Prime subscriber figures, but experts estimate it at 250M, with 180M of those in the US. This makes Prime one of the most popular subscription services in the world!
Last quarter, Amazon made $11.7B from Subscriptions, up 9.3% Y/Y!
Q1 2025 growth of 9.3% decelerated from 9.7% and 11% in Q4 and Q1 of 2024.
Furthermore, Q1 Subscription revenue growth was the slowest in 11 quarters.
At this scale, price increases drive revenue growth more than user growth. Amazon last increased Prime prices in the US and EU in 2022, which I believe were largely responsible for the acceleration in Subscription revenue growth in 2023.
I think we could be a few quarters away from Amazon increasing Prime prices again. This subscription provides immense value to customers, so cancellations will probably be minimal.
5. AWS
AWS is the crown jewel of the company and continues to execute as such. The demand for Cloud infrastructure and Cloud computing services keeps growing as the world’s economies digitize.
In Q1 2025, AWS had sales of $29.3B, up 17% Y/Y, whilst operating profit grew 22.6% to $11.5B!
AWS Q1 revenue growth rate of 17% was slightly below the previous quarter’s 19% growth rate, but it was in line with Q1 2024.
I don’t see tariffs having a huge impact on demand for AWS. While some of Amazon’s customers will be affected, I don’t really see reducing cloud services as an effective cost-cutting measure, as AWS services are crucial for their operations. Additionally, computing demand for AI training and inference is strong.
Where I could see tariffs have some adverse impact is margins.
AWS now has a stellar EBIT margin of 39.5%, and since the cloud slowdown in 2022, partially caused by the bursting of the 2021 tech bubble, AWS’s EBIT margin has grown for 8 quarters in a row.
The 2 biggest drivers of margin on the cost side are energy and server costs.
Tariffs could increase energy prices as various energy input costs increase and demand for local energy rises. However, slower global demand could put downward pressure on prices, so it is difficult to assess the net result on AWS.
In regard to server costs, Amazon is investing heavily to develop new server chips (Trainium) that are customized for AWS workloads. These more advanced chips are increasing processing power and reducing energy costs. Additionally, Amazon buys a lot of server chips from Nvidia, Intel, and AMD.
Tariffs will significantly raise semiconductor prices if the exemption is not extended. Even if chip tariffs are extended, other tariffs are still in effect. So, US foundries will have to deal with higher input costs. Amazon could offset some of this increase with better chips, but it is unclear by how much.
Key points from the call:
“It's useful to remember that more than 85% of the global IT spend is still on premises, so not in the cloud yet. It seems pretty straightforward to me that this equation will flip in the next ten to twenty years.”
"Before this generation of AI, we thought AWS had the chance to ultimately be a multi hundred billion dollar revenue run rate business. We now think it could be even larger."
“While we offer customers the ability to do AI in multiple chip providers and will for as long as I can proceed, customers doing AI at any significant scale realize that it can get expensive quickly. So the 30 to 40% better price performance that Tranium two offers versus other GPU based instances is compelling.”Amazon Q1 2025 Earnings Call
6. Consolidated Financials
Overall, Amazon delivered a strong quarter that positions them well to not only survive, but thrive during Trump’s Trade War.
In Q1 2025, Amazon posted revenues of $155.7B, up 8.6%, meanwhile EBIT increased by 20.2% to $18.4B, but net income jumped 64.2% to $17.1B!
In the graph above, we can observe a clear trendline of growing revenues and profitability.
In Q1 2025, Amazon’s sales and EBIT were $12.35B and $3.1B higher than the prior year. This means that Amazon had an incremental EBIT margin of 25%, which is more than double the overall EBIT margin.
EBIT margin was 11.8%, a slight improvement over 10.7% in Q1 2024.
EBIT margin improved on the account of operating expenses increasing by 7.2%, below the 8.6% revenue growth.
EBIT margin grew, despite fulfilment and tech costs rising 10.2% and 12.6%, as Amazon found efficiencies elsewhere.
Gross margin rose from 49.3% to 50.6%. Additionally, marketing expenses grew only by 1% whilst administrative costs were reduced by 4.2%.
Net income and EPS increased by 64% and 62%, respectively. Supported by a $5.5B Y/Y swing in non-operating income (from a $2.2B loss to a $3.3B gain). This can partially be explained by a $3.3B unrealized gain in Amazon’s equity investment in the AI start-up Anthropic.
Cash Flow
Amazon’s FCF collapsed 300% to negative $8B as Capex exploded. This is not out of the ordinary for Amazon as the company goes through various phases of investment.
Q1 2025 capex grew 67% to $25B as Amazon continues to invest in AWS and its logistics network!
In the chart above, we see that capex went from falling 24% in Q2 2023 to increasing 91% in Q4 2024.
It is likely that Amazon’s capital expenditures will remain elevated, despite the economic uncertainty. Amazon has a history of heavy spending during market downturns (2008 and 2020), so Trump’s Trade War won’t change that.
Currently, Amazon is investing heavily to grow its logistics network in new emerging markets of India, Brazil, Mexico, Poland, and Turkey.
Additionally, AI demand is driving capex investments in AWS.
Guidance
Amazon guided for a 7-11% revenue growth in Q2, however, they emphasized the uncertainty caused by tariffs.
This can be seen in the EBIT guidance, as the guide includes a possibility of an 11.6% decline, with the range extending to a growth of 19%.
From -11.6% to +19% is quite a range, and really shows the difficulty in managing these supply chain problems.
7. Valuation
The same as with Google, at this moment, I don’t see a need to update the assumptions in the Amazon valuation model from January.
However, if Trump’s Trade War escalates, then there could be some short-term noise as lower consumer spending and higher costs could put pressure on margin expansions.
However, in the long term, I believe Amazon’s fundamentals are strong and their Alaska-sized moat is set to continue increasing!
As Amazon is down 13% YTD, I find the valuation even more attractive, so I updated my valuation model with the current share price of $184.
You can read more about my assumptions in my Amazon Investment Case.
According to my model, there is a 118% to 205% upside to Amazon by 2030, a CAGR of 14% to 20%!
8. Conclusion
To describe the current situation I would like to borrow a famous quote from a popular book and TV series.
“Chaos isn’t a pit, Chaos is a ladder,” Peter Baelish from Game of Thrones. A Song of Ice and Fire. George R.R. Martin.
Trump has created a huge crisis, and Amazon will not waste this opportunity to strengthen its position. While other companies suffer because of the chaos, Amazon will use it as a ladder to gain even more market share.
There is possibly no company in the US more capable of surviving supply chain disruptions than Amazon. While smaller and medium-sized companies suffer, Amazon is investing in logistics to deliver packages faster, cheaper, and in more places than ever before.
Thank you for reading Global Equity Briefing!
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