Amazon.com Inc. (NASDAQ: AMZN) enters the new trading week amid a notable pullback in US nonstore retail sales, which fell 2.2% in July. The decline comes on the heels of Amazon's strategic decision to move its Prime Day event to June, a shift that has reshaped the timing of online spending and complicates the retail giant's near-term revenue trajectory.
The broader retail environment also showed signs of strain. Overall retail sales slipped 0.6% month-over-month, missing the consensus forecast of a 0.1% increase. Core retail sales, a key input for gross domestic product calculations, dropped 0.4% against expectations of a 0.3% gain. These figures underscore a softening in consumer demand that extends beyond Amazon's own promotional calendar.
Amazon's stock closed Friday at $262.65, down 0.94%, reflecting investor caution. The company's third-quarter revenue guidance points to a midpoint of $199.5 billion, a modest 0.5% sequential decline from the second quarter's $200.6 billion. Year-over-year growth is expected to slow to 10.5%, nearly half the 20% pace achieved in Q2.
While the e-commerce slowdown grabs headlines, Amazon's cloud computing division, Amazon Web Services (AWS), continues to provide a robust profit buffer. In the second quarter, AWS generated $16.6 billion in operating income, representing 60.4% of Amazon's total operating profit, despite contributing only 21% of overall revenue. AWS's operating margin stood at an impressive 39.3%, compared to 7.8% for North America and 4.0% for international segments.
Chief Executive Andy Jassy highlighted AWS's accelerating growth, noting a 36.7% year-over-year increase in Q2—the fastest in 18 quarters. Both AWS's AI and chip operations have surpassed $25 billion in annual revenue run rates, signaling sustained momentum in high-margin areas.
Looking ahead, Amazon's guidance for the third quarter projects operating income between $22.5 billion and $26.5 billion, with a midpoint of $24.5 billion—an 11% decrease from the second quarter's $27.5 billion. The softer outlook reflects the absence of a Prime Day boost and ongoing investments in AI infrastructure, which have already swung trailing free cash flow to a $7.6 billion outflow from an $18.2 billion inflow.
Analysts remain cautiously optimistic, with FactSet reporting an average price target of $320.01, implying a 21.8% upside from Friday's close. Several firms, including Piper Sandler, Cantor Fitzgerald, Barclays, and JPMorgan, have issued overweight ratings with targets ranging from $320 to $365.
However, risks remain skewed toward consumer spending. The July retail data, coupled with a decline in core sales, raises the bar for the holiday season. If consumer sentiment continues to weaken, AWS's profitability will become even more critical to Amazon's valuation. The market's immediate focus will be on whether investors view the July dip as a temporary timing artifact or a sign of deeper demand challenges.
