Amazon's stock price drops 12% following third-quarter outlook that falls short of expectations.

• On Friday, Amazon's stock price dropped after the company announced a revenue shortfall and poor second-quarter forecasts the previous day.
• The company's core retail business is experiencing slower sales, and it attributed some of this to the chaotic news cycle.
• Despite a weak quarter, analysts were optimistic about Amazon's cloud business.

On Friday, shares of the company dropped by as much as 12% after reporting mixed second-quarter results and providing a forecast for the third quarter that did not meet Wall Street's expectations.

In the second quarter, revenue increased by 10% from the previous year to $147.98 billion, but fell slightly short of the projected $148.56 billion by LSEG. Meanwhile, Amazon's net income doubled from the previous year to $1.26 per share, surpassing analysts' expectations of $1.03 per share and providing further evidence that the company's cost-cutting strategy is benefiting its bottom line.

Amazon expects revenue of $154 billion to $158.5 billion for the third quarter, which runs through September. However, the midpoint of the range, $156.25 billion, fell short of consensus estimates of $158.24 billion, according to LSEG.

Amazon CFO Brian Olsavsky stated that the company experienced softer-than-anticipated sales due to consumers' tendency to "trade down" to lower-priced items, such as daily necessities and consumables, which are typically cheaper and used up regularly. Additionally, the chaotic news cycle has caused consumers to be more distracted, leading them to delay making purchases or abandoning their carts, according to Olsavsky.

Recent events such as the Olympics, the presidential election, and the assassination attempt of former President Donald Trump have made it difficult to accurately forecast consumer behavior, according to Olsavsky.

JP Morgan analysts were less concerned about the retail miss but more encouraged by Amazon's cloud computing strength, as Amazon Web Services revenue reached $26.3 billion during the quarter, exceeding consensus estimates of $26 billion.

JP Morgan analysts wrote in a note to clients that sometimes Amazon's retail business leads and other times it's their cloud computing division, AWS. They have an overweight rating on the stock.

AWS growth has accelerated for three consecutive quarters, indicating that the cost optimization observed in recent quarters is now a thing of the past, according to BMO Capital Markets analysts.

"The analysts, who have an outperform rating on Amazon shares, believe that AWS is well-positioned to benefit from a shift back to modernization, with additional benefits as new workloads are born in the cloud. Despite the view that Amazon is far behind in AI, the analysts see Amazon as a key AI beneficiary, having already achieved a multi-billion dollar run-rate business in AI."

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