Despite Trade-Off, Amazon Is Equipped to Weather Tariffs

We are seeing shares of Amazon AMZN trade-off on Friday following the company’s outlook on Thursday night for the current quarter, including operating income that was below market expectations despite revenue guidance that bookends consensus expectations.

The culprit is the impact of tariffs on Amazon’s North America digital shopping business, however, we also have to recognize that Amazon tends to skew overly conservative with its operating income forecasts. Speaking to that, March quarter operating income came in at $18.4 billion, ahead of the $14 billion to $18 billion guidance issued early this year, which translates into some nice margin expansion in the March 2025 quarter compared to the year-ago one. For the current quarter, Amazon guided operating income to $13 billion to $17.5 billion versus the $17.8 billion market consensus on revenue between $159 billion to $164 billion compared to the market consensus of $161.5 billion.

Getting back to that March quarter operating income, we can trace its upside surprise back to a few factors, including Amazon Web Services (AWS) revenue growth outpacing overall revenue growth for the quarter, making that higher margin business a larger portion of the revenue mix. The same can be said about Amazon’s advertising services business, which grew 11% year over year to account for about 9% of March quarter revenue, and its subscription services drove 7.5% of overall revenue for the quarter. All told, those three businesses accounted for more than 35% of March quarter revenue up from roughly 33% in the year-ago quarter.

That’s not to dimmish revenue growth and margin expansion at Amazon’s North American or International segments during the March quarter, but rather to highlight how those faster-growing and higher-margin businesses can insulate Amazon’s profits from tariffs. To that end, during the earnings call CEO Andy Jassy called out the $117 billion annual revenue run rate for AWS with the backdrop that more than 85% of the global IT spend is still on-premises, not in the cloud as yet, there is ample room to run.

AI adoption is clearly a driving force at AWS, something inferred from the weekly signals we share with members, but Jassy’s comment that it “continues to grow triple-digit year-over-year percentages” reaffirms that we are still in the early innings. We see that as very positive for our shares of Nvidia NVDA and Marvell MRVL but also Elastic ESTC, ServiceNow NOW and others. Much like Meta META, Amazon is also turning AI inward, which should also help drive further productivity gains across its various business lines, helping to deliver further overall margin gains.

So, the question to ask is: Why aren’t Amazon’s shares down more on Friday, given that operating income guidance shortfall relative to market expectations?

The answer is found in what we discussed earlier on Friday — the potential thawing in trade talks between the U.S. and China, and the impact that progress on that front could have for tariffs. As we discussed in our comments that addressed that development, we view those reports as constructive, and while we may be hopeful about what comes next, we continue to think these talks will be measured in weeks not days, and that the ultimate details will be what matters most.

Any rollback or elimination of Trump tariffs would lead to Wall Street revisiting 2H 2025 expectations for Amazon. Near-term, however, we will soon be hearing from retailers that lack those higher-margin businesses housed inside Amazon that will help minimize the overall impact of tariffs on Amazon’s bottom line. In our view, that context to come will remind folks that, while Amazon should continue to win consumer wallet share, it is much more than just a digital shopping company.

Should we see AMZN shares get dragged lower as other retailers report in the next few weeks, we will look for compelling opportunities to scoop up some additional shares. Before too long, we will move into the seasonally stronger second half, which tends to account for the majority of Amazon’s revenue and cash flow.

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At the time of publication, TheStreet Pro Portfolio was long AMZN, NVDA, MRVL, ESTC, NOW and META.