Amazon Stock Declines Despite Strong Q1 Results for 2025

Amazon‘s AMZN stock has faced a 5.8% decline year-to-date, disappointing investors. This drop comes despite the company reporting solid first-quarter results for 2025 that surpassed market expectations. Investors now must decide whether to hold their positions or wait for better entry points in the second half of 2025.

The first-quarter 2025 results showcased Amazon’s operational strength, with revenues reaching $155.7 billion, a 9% year-over-year increase. Net income rose 64% to $17.1 billion, while earnings per share increased to $1.59, up from $0.98 in the prior year. Operating income grew 20% to $18.4 billion, exceeding the higher end of management’s guidance.

Revenue growth was evident across segments. The North America segment posted an 8% increase to $92.9 billion, while International operations also grew by 8%, excluding foreign exchange impacts. These results indicate that Amazon’s core retail services remain strong despite macroeconomic challenges.

In contrast, free cash flow significantly declined to $25.9 billion from $50.1 billion in the previous year. This reduction is attributed to heightened capital expenditures, which reached $87.9 billion, driven by investments in AI infrastructure and fulfillment network expansion. Although this investment cycle aims for long-term growth, it may pressure near-term cash flow.

Valuation metrics raise concerns about near-term upside. Amazon’s forward 12-month Price-to-Sales ratio stands at 3.04X, notably above the Zacks Internet – Commerce industry average of 2X, suggesting the stock could be fully valued at its current price.

AMZN’s P/S F12M Ratio Indicates Premium Valuation

Image Source: Zacks Investment Research

AWS Growth Continues Despite Capacity Issues

Amazon Web Services (AWS) reported a steady 17% year-over-year growth, generating $29.3 billion in revenues for the quarter, with an annualized run rate of $117 billion. AWS operating margins improved to 39.5%, showcasing the segment’s scalability.

Nevertheless, AWS faces capacity constraints that limit its ability to address increasing AI-driven demand. Management indicated that improving capacity deployment could enhance revenue growth, implying that AWS performance might accelerate as bottlenecks resolve throughout 2025. The AI segment alone has a multi-billion-dollar annual run rate with triple-digit growth, positioning AWS favorably in the AI landscape.

AWS backlog reached $189 billion, with a 4.1-year weighted average life, offering significant revenue clarity and supporting future growth prospects. Recent customer acquisitions from companies such as Adobe and Uber reflect ongoing enterprise adoption across various sectors.

AI Innovation Drives Growth

Amazon’s AI initiatives offer a notable competitive edge. The company recently launched an enhanced version of the Amazon Q Developer experience in the AWS Management Console, Microsoft Teams, and Slack, now capable of answering more complex queries.

However, competition in the AI sector is intensifying, with significant advancements from Microsoft, Nvidia, and Alphabet’s Google. Microsoft is integrating AI agents into its business applications, while Nvidia has introduced new reasoning models. Collaborations such as LTIMindtree’s partnership with Google Cloud further highlight the swift adoption of agentic AI across industries.

With the 5.8% decline year-to-date, AMZN has underperformed compared to the broader Zacks Retail-Wholesale sector and the S&P 500, which posted returns of 2.2% and 0.4% respectively. In contrast, shares of Microsoft and Nvidia have gained 9.6% and 2.3%, while Alphabet’s stock has retreated by 10.7% during the same period.

AMZN’s Year-to-Date Performance

Image Source: Zacks Investment Research

AMZN has also introduced Claude 4 models via Amazon Bedrock, showcasing advanced reasoning capabilities for complex tasks. The introduction of Alexa+ illustrates Amazon’s shift towards action-oriented AI agents with promising early feedback, although broader deployment is still in its initial stages. The company’s Nova foundation models are also gaining traction among clients, including Slack and Siemens.

AI implementations extend beyond AWS and into retail operations, contributing to product discovery, personalized experiences, and review summaries. These integrated AI efforts create opportunities for cross-selling while enhancing customer engagement.

Operational Challenges and Tariff Pressures

Amazon encounters operational challenges that may affect its near-term performance. Tariff uncertainties complicate inventory management and could lead to cost pressures. Nevertheless, management has indicated confidence due to a diversified supplier base and operational flexibility.

The necessary infrastructure investments, while positioning Amazon for long-term leadership, strain current cash flows. Current capital expenditures target AI capacity, fulfillment automation, and Project Kuiper satellite deployment, although they pressure short-term financial outcomes.

The Zacks Consensus Estimate predicts net sales of $693.68 billion for 2025, representing an 8.73% increase year-over-year. Additionally, the estimated earnings for 2025 stand at $6.31 per share, up 14.1% from the previous year.