☁️ Amazon: First Inning for AI

AWS keeps growing, but Kuiper will weigh on Q2 profits

App Economy Insights

May 02, 2025

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1. Amazon Q1 FY25

Income statement:

Revenue breakdown:

💻 Online stores (37% of overall revenue): Amazon.com +5% Y/Y.
🏪 Physical store (4%): Primarily Whole Foods Market +6% Y/Y.
🧾 3rd party (23%): Commissions, fulfillment, shipping +6% Y/Y.
📢 Advertising (8%): Ad services to sellers, Twitch +18% Y/Y.
📱 Subscription (9%): Amazon Prime, Audible +9% Y/Y.
☁️ AWS (19%): Compute, storage, database, & other +17% Y/Y.
Other (1%): Various offerings, small individually +4% Y/Y.

Revenue grew +9% Y/Y to $155.7 billion ($0.6 billion beat).
- Excluding AWS:
  - North America grew +8% Y/Y to $92.9 billion.
  - International grew +5% Y/Y to $33.5 billion.
Gross margin was 51% (+1pp Y/Y).
Operating margin was 12% (+1pp Y/Y).
- AWS: 39% margin (+2pp Y/Y).
- North America: 6% margin (+1pp Y/Y).
- International: 3% margin (+0pp Y/Y).
EPS $1.59 ($0.23 beat).

Cash flow (trailing 12 months or TTM):

Operating cash flow TTM was $114 billion (+15% Y/Y).
Free cash flow TTM was $26 billion (-48% Y/Y), driven by the operating cash flow growth, offset by an 80% rise in Capex to $88 billion.

Balance sheet:

Cash, cash equivalent, and marketable securities: $95 billion.
Long-term debt: $53 billion.

Q2 FY25 Guidance:

Revenue +7% to +11% Y/Y (~$0.4 billion beat).
Operating income $13 to $17.5 billion ($17.8 billion expected).

So, what to make of all this?

One-offs: The top line faced a $1.4 billion currency and a leap-year headwind. Excluding these, revenue grew 10% Y/Y. On the other hand, net income benefited from a boost from an unrealized gain tied to the revaluation of the investment in Anthropic.
Tariff clouds loom over Q2: Amazon beat expectations in Q1, but issued cautious guidance for Q2. Management flagged tariffs, trade policy, and recession fears — a shift from the previous call.
Pull-forward possible: CEO Andy Jassy noted “heightened buying” in some categories, suggesting some shoppers may be stocking up ahead of future price hikes. For now, prices haven’t materially changed, but third-party sellers remain exposed.
Third-party growth slowing: Revenue from third-party seller services grew just +6% Y/Y — its slowest pace in years — as sellers face higher costs and uncertainty. This has ripple effects on Amazon’s ad business, which remains strong (+18% Y/Y) but vulnerable to SMB budget cuts.
AWS growth was steady despite constraints: AWS revenue grew 17% Y/Y, slightly below projections. It underwhelmed relative to Microsoft Azure’s acceleration, raising questions about near-term momentum.

Margins under pressure: Q2 operating income guidance missed the Street’s consensus at the midpoint. Some Kuiper launch costs will hit the P&L (more on this in a minute), causing some variability. In addition, analysts worry Amazon may absorb some tariff-related costs to maintain its low-price advantage.
Capex and AI are still front and center: Amazon reiterated its $100 billion 2025 CapEx plan, focused heavily on AI infrastructure.

2. Recent developments

🚢 Tariffs Cast a Cloud Over Amazon

Tariffs are starting to bite. Since early April, hundreds of Amazon sellers have raised prices, with SmartScout estimating some categories up nearly 30%.

While Amazon says the impact is limited, the risk to its marketplace model—broad selection and low prices—is real.

Over 50% of Amazon sellers are based in China (Marketplace Pulse).
Many US-based sellers also source heavily from China.
Supply chain shifts to countries like Mexico and India could take years.
Higher costs could ripple into Prime, advertising, and fulfillment margins.

It’s less about Q1 and more about how tariffs could reshape Amazon’s e-commerce engine in the quarters ahead.

Some analysts warn that prolonged tariffs could thin product selection, raise prices, and pressure Amazon’s most profitable businesses.

🧨 Political Backlash: Amazon found itself in the political crosshairs this week after reports claimed it would display tariff costs at checkout. The idea, Amazon said, was only considered for Amazon Haul—its Temu competitor—not the main site. But that nuance was lost. The White House called the idea “a hostile and political act,” prompting a personal call from Trump to Jeff Bezos. Amazon quickly clarified the idea “was never approved.” The episode highlights how misinformation can escalate quickly, and how Amazon’s actions are now viewed through an increasingly partisan lens.

☁️ AWS market share and margins

Total cloud infrastructure market spending grew by 23% Y/Y to $94 billion in Q1 2025, an acceleration from 22% Y/Y in Q4 2024. And it would have been even faster without 2 points of currency headwinds. GenAI remains a critical growth factor.

AWS had a commanding 29% market share, compared to 22% for Microsoft Azure and 12% for Google Cloud. Overall, Synergy Research Group estimated that AWS lost 1 point of market share to Azure. Some of the fastest-growing tier-two cloud infrastructure providers were CoreWeave, Oracle, Snowflake, Databricks, and Snowflake.

For context, in the March quarter:

Google Cloud grew 28% Y/Y (a slowdown from 30% Y/Y in Q4).
Microsoft Azure grew 33% Y/Y (an acceleration from 31% Y/Y in Q4).
AWS grew 17% Y/Y (a slowdown from 19% Y/Y in Q4).

As always, I wouldn’t read too much into Azure and Google Cloud’s growth rates relative to AWS, since they are all capacity-contained and have a different product mix.

What about margins? AWS continued to expand its operating margin. Management warned that margins could fluctuate as AI investments flow through the P&L. AI is a potential short-term headwind on margin, but management expects the AI margin to match that of the non-AI business over time.

While AWS’s operating margin improved by 2 percentage points to 39%, it was primarily due to an accounting adjustment (the useful life of servers was extended).

🤖 The three layers of the AI stack

Amazon continues to build aggressively across all three layers of the AI stack — infrastructure, models, and applications.

Andy Jassy provided a few updates:

⚙️ 1) Infrastructure

Amazon is scaling its AI infrastructure with a mix of custom silicon and NVIDIA chips:

Trainium 2, its second-gen AI chip, is rolling out at scale, delivering 30–40% better price performance than comparable GPU instances.
Demand is outpacing supply. Jassy confirmed AWS is adding capacity as fast as possible, but supply chain constraints (like motherboards) are still easing.
Project Rainier, an AI supercluster powered by Trainium 2 and built with Anthropic, is in the works.
Amazon sees reducing inference costs as a core mission to unlock mainstream AI adoption.

🧠 2) Models

Amazon Bedrock — its LLM-as-a-Service platform — is expanding rapidly:

Recently added models include Claude 3.7 (Anthropic), Llama 4 (Meta), DeepSeek R1, and Mistral’s Pixtral Large.
Amazon’s own foundation model family, Nova, continues to evolve. The Nova Premier model launched this quarter, with customers like Slack, Coinbase, FanDuel, and Siemens.
Nova Sonic, Amazon’s new speech-to-speech model, offers low error rates and more human-like expression.

Amazon is also exploring action-oriented AI agents:

Nova Act is a new model trained to complete tasks in a web browser (search, checkout, upsells).
The goal is to raise multi-step task accuracy from 30% to 90% or higher, enabling complex AI workflows.

📱 3) Applications

Amazon is integrating generative AI across its ecosystem:

Amazon Q: A full-stack assistant for developers now supports agentic coding workflows, multi-step refactoring, and automated code review in Git environments.
Alexa+: A major AI upgrade is rolling out. Now capable of taking multi-step actions (adjusting lights, temperature, music) — no longer just answering questions.
AI is now embedded across Amazon—from fulfillment and shopping to Prime Video and ads.

3. Key quotes from the earnings call

CEO Andy Jassy on tariffs:

“We’re doing everything we can to keep prices low for customers in a way that makes economic sense. […] We have a better chance of some sellers deciding they’re going to capture share and not pass on all or any of those tariffs to customers.“

Jassy is confident Amazon’s scale, pricing power, and broad selection can help it gain share, just as it did during the pandemic.

On impact from China:

“Amazon is not uniquely susceptible to tariffs. […] Retailers who aren't buying directly from China are typically buying from companies who themselves are buying from China, marking these items up […] The total tariff will be higher for these retailers than for China Direct Sellers.“

This is a critical distinction. Amazon’s marketplace model may insulate it better than competitors who rely more heavily on traditional wholesale and resale channels.

On AWS capacity:

“As fast as we actually put the capacity in, it's being consumed. […] There is so much demand right now, but I do believe that the supply chain issues and the capacity issues will continue to get better as the year proceeds.”

With Amazon spending more on CapEx than any other Big Tech company in 2025, AWS may see relative upside in H2 as new capacity comes online.

4. Kuiper, Prime, and what’s ahead

🛰️ Project Kuiper’s bumpy launch

Amazon’s $10 billion satellite broadband initiative is gaining altitude — but it’s not smooth sailing yet.

What’s happening:

Production delays: Only a few dozen Kuiper satellites had been built earlier this year, far from the 1,600 needed by mid-2026 to meet FCC deployment rules.
Manufacturing challenges: Complex designs, supplier issues, and in-house production slowed the ramp-up.
First launch success: This week, Amazon successfully launched 27 Kuiper satellites aboard a ULA Atlas V rocket — the first of 80+ launches needed to build out the 3,200-satellite constellation.

Why it matters:

Regulatory risk: Amazon must deploy half its constellation by July 2026 or risk losing its FCC license (though extensions are possible).
Political headwinds: Elon Musk, CEO of SpaceX, is advising the White House. Amazon, by contrast, has a rocky history with President Trump.

The bigger picture:

Starlink dominance: SpaceX already has 5+ million customers and 8,000+ satellites in orbit, with launches almost daily.
Reputation gap: Starlink’s recent cancellations in the UK and Canada—partly tied to Musk’s political affiliations—give Kuiper a potential opening.
Amazon’s path forward: The company says it’s still on track to begin service later this year, but the clock is ticking.

🛒 Prime’s distribution advantage

Advertising revenue reached $13.9 billion in Q1, representing:

27% of Google Search advertising revenue (+2pp Y/Y).
33% of Meta's advertising revenue (+0pp Y/Y).
156% of YouTube ads revenue (+10pp Y/Y).

In 2024, Amazon shifted all Prime Video users to its ad-supported tier, unless they pay $2.99/month to remove ads.

Prime Video captured 3.5% of U.S. TV time in March 2025 (Nielsen), nearly half of Netflix’s share, and up 0.7pp Y/Y.
US Prime memberships grew 9% Y/Y to 196 million (CIRP), giving Amazon unmatched distribution compared to Netflix’s 90 million US subs.

While most join for shipping perks, engagement with Prime Video is clearly rising.

New Antenna data shows the power of Amazon Channels:

In Q4 2024, after adding Apple TV+, Amazon Channels drove 1.5 million new sign-ups, accounting for 25% of all Apple TV+ sign-ups by December.
73% were brand-new to Apple TV+, vs. just 48% for Apple’s own iTunes sign-ups.
Notably, this was not a churn recapture story — of 2.8 million Apple TV+ cancellations via iTunes, only 47,000 resubscribed through Channels.

The takeaway: Third-party distribution is not just a retention tool — it’s a growth engine. In a crowded streaming market, distribution is the moat. And Amazon owns the rails.

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Disclosure: I am long AMZN, GOOG, META, NET, and SNOW in the App Economy Portfolio. I share my ratings (BUY, SELL, or HOLD) with App Economy Portfolio members.

Author's Note (Bertrand here 👋🏼): The views and opinions expressed in this newsletter are solely my own and should not be considered financial advice or any other organization's views.