Instant Reaction: Amazon Gives Weak Forecast on Trade Concerns
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Looking at shares of Amazon in the after hours, one number that really sticks out to everybody, second quarter operating income outlook misses $13 billion to $17.5 billion. The estimate was for $17.82 billion. Let's get into it with Caroline Hyde. She's the co-host of Bloomberg Technology on Bloomberg TV each day at 11 Wall Street time. She joins us here in the Bloomberg Interactive Brokers studio. Caroline,

Caroline, typically we'd be talking about AWS in any other quarter. That's crazy. That's not at all. I mean, for years, that's what we do. AWS, that's what we care about. That's where the margins are. But then you have Liberation Day, so-called Liberation Day. And now all anybody cares about is AWS.

Who's paying for these tariffs? But I suppose there's also still the focus on margins. The reason we care so much about AWS is it's the profit driver. Right. But we're now worrying about a profit issue here with an operating income number coming in well below expectations. That breadth of guidance that they give us, that almost like $4 billion wiggle room, that's very normal. Is that operating income guidance hit? Is that due to tariffs or is it due to competition when it comes to AWS?

I think we have to work out also whether it's infrastructure spend. Look, what happened with Meta was that they said, look, we're going to have to be spending more on our capital expenditure because the infrastructure costs are going to be a little bit higher. But profitability overall is going to be sucked up by what ultimately they're going to have to pay for from a margin perspective. Is it that they suck up some of the margin, hit themselves to keep the consumer, which is in a vulnerable position, safe?

keep coming back to Amazon? Is it also that the third party sellers are going to be retrenching a little bit more? What was going to be happening to advertising? Because they did really well on advertising. But if you're seeing from some of these snap and the likes of others talking about the Chinese retailers no longer wanting to be overall spending on advertising, is that going to be taking a lot in terms of the overall margin generation? And ultimately, what does this mean in terms of how much AWS and its strength being able to prop up

an e-commerce side of the business that has to suck up a margin hit if they're going to be able to keep the consumer coming. We were kind of blown away. And I mean, I went through the press release really quickly. I didn't see tariffs. Alex mentioned one, but it was kind of in the bottom disclosure. Like they didn't seem to touch it. And you can assume. Would you touch it? Soon.

Susan Lee did not touch it. She didn't even use the word tariff as a CFO of Meta. They at least put tariff and trade policies, which are the only new lines in that forward-looking guidance paragraph. All right. But you know, that's going to be top of mind. Don't say the word. I know. It's kind of amazing. But I get it. I get it. I mean, I don't know. What...

What kind of color can we expect from them? I think there's so much speculation. I mean, will they be able to really pinpoint the cost? What are they seeing at this point, Caroline? Because I think Andy Jassy did give an interview earlier in the month, well, earlier in last month now, in April. Isn't it

mad that it's May. It's crazy. But looking back, and really he was saying, look, there's going to be horses for courses. There are some negotiations that we're in the midst of. And yes, maybe we start to try and push back and ask for ultimately the ultimate seller, the Chinese seller. Remember, Amazon gets about 70% of its products from China, whether they're selling them on their own platform, whether they're selling them via third parties. And so are they going to pass that off on them if they're in the midst of a negotiation? Maybe they do. But

otherwise, if they've got the contract already existing, they're going to have to suck it up a little bit themselves. And we certainly know that they're not going to be making evident how much the tariff is going to be adding to their prices. How do you roll that into, right? That's the report that they...

Were they really considering? I'm sure a lot of these things, it's the same with the Tesla story and potentially maybe they have to consider a new CEO at some point. There's probably no smoke without fire. I'm pretty sure at some point the whole side of the business, now the whole side, super low cost.

Well, she and Antimu are making it evident how much tariffs are increasing. They are. So probably you went internally, oh boy, that's what they're doing. Maybe we should consider something similar. But at no point was this signed off. At no point was this run up the ladder and them going, oh yeah, off you go. Stop making evidence. So I'm pretty sure that they are clear that this was not signed off. This was not agreed to. But they have to be discussing. But they have to consider it. It would be foolish not to.

Amazon at least find itself in find itself in the position that this is not a story that's unique to Amazon from the perspective of a retailer. Companies such as Walmart and Target would have to go through the same thing. So true. What is different, though, is Amazon's exposure for its cloud business. So we can't look at Microsoft as sort of a pure play comparison to Amazon anymore or even Google Cloud. Yeah.

What does it mean that Amazon, it kind of doesn't matter if they have to raise prices to the extent of competition coming in and saying, you know, we can get this product for cheaper for elsewhere. Because if Amazon's prices go up from their suppliers, I'm talking physical goods here that are sold through the retail site, everybody's prices are going to go up too. And that just means, you know, as American consumers who buy this stuff, we're the ones who are going to have to be paying. And that is trying to be what's

told to the consumer base right now. Evidently, this is going to be an inflationary pressure. Bank of America Securities, ahead of these numbers, put it really well that basically, you know, it's going to be the biggest focus is tariffs. And given that everyone's in the same boat, ultimately, you're going to have to bet a little bit that Amazon's going to weather this better than anyone else. They've got the cash on the balance sheet. They've got potential investors

to stomach some of the margin hit much more so than a Wayfair or some others that are offering e-commerce out there. And so, yeah, Amazon is the one perhaps in this difficult situation that you build on to ride out the storm. But there's always the flip side too because, you know...

The 70% of their goods, right, that come from China, whether it's directly or through, you know, they employ Chinese workers, right? So I'm just curious, like, what's the Chinese perspective on Amazon and the importance it is to their economy? Do you ever think of, like, you know...

I don't know. I don't know. And that's the key question for Xi Jinping is that ultimately, how much do they have to support their own economy, support some of their exporters at this moment? And I'm pretty sure that China has decided that they're going to fight fire with fire in many ways and decide that if you want to cut us off, so be it. But I think Amazon is the one in the position here that has to help with the renegotiations, has to stomach some of the margin hit because we don't know where this is going for the next few months. I

At the moment, they're facing 145, 125% tariff. Where does it go from here? How much are they able to change supply chains? So in the interim, they probably suck up the margin here. In the longer term, how do they start to change? As we've seen with Apple, oh, suddenly a lot of my goods are coming from India now. Which other countries start to benefit? But you're right. What is their relationship like with their suppliers? How are they trying to make things...

What things that's interesting with Amazon always, they're not afraid to disappoint investors on profit. Good point. Their sales are actually looking pretty good. They spent a decade doing it. A decade doing it. Their forecast is good and resilient for sales. It's just they're saying, sorry guys, suck up the operating margin here. The stock is now, I mean, still down 2%, but it's not down 4% or 5%, which it was before. Call hasn't started. No, true. And they're talking all about the innovations. They're talking about the satellite side of the business. They're talking about putting SACs

as an offering on the e-commerce site. They're talking about what you can get in terms of AI innovations if you're coming to their cloud computing. Also, they're foundational models that are going to aim at consumers too. They've got their own chips. They're going to try and talk up the resiliency of their business model when in the interim, yes, they might going to have to pass on some costs to the consumer base and the e-commerce bit

this lag is somewhat, it's just like, as you said, amazing. We would normally be just like all of our AWS. That's what we just kind of care about. Caroline, you got to go. TV is calling. They want to talk to you. Caroline is the co-host of Bloomberg technology on a Bloomberg TV, 11 o'clock.

Wall Street time. Let's go continue on Amazon, specifically on the retail side. I want to bring in Poonam Goyal, senior analyst for e-commerce at Leisure, off-price retail for Bloomberg Intelligence. She joins us from New York City this afternoon. Let's talk about this miss when it comes to second quarter operating income, the outlook there. Is that a result of tariffs in your view?

It has to be, because when I think about the operating margin that they just posted with AWS, you know, incredible near 40 percent, the downside that we're seeing going into 2Q, I can't think of anything else that could be driving that than higher costs that they'll have to absorb due to the tariffs. Are you surprised that, like, we kind of, you know, went through that press release yesterday.

There's really nothing on tariffs. There's like that disclosure that kind of dumps everything at the very bottom of the page. Not surprising to see that they didn't really address it in the release. And I guess it's all going to come out on the call.

Yeah, I think there's going to be a lot of questions about tariffs. Keep in mind that, you know, Amazon is directly exposed on the 1P side. So roughly 40% of its business is where they do have to deal with tariffs. The other 60%, that's 3P, the sellers have to deal with them. But Amazon helps you set the price on its platform to make it competitive. So there's just a lot of back and forth that's going on. And with some suppliers, they are working one-on-one to see where they can help offset the price increases.

But the biggest delta between 1Q and 2Q is tariffs. So the guidance that we see here has to be a result of that wide net that they've casted. You mentioned the P's. Translate for us.

Sure. Third party and first party. When Amazon owns the goods. So basically they take on the cost and they directly source it from the supplier. Third party is if you and I go on to Amazon and we start selling stuff. What's the breakdown in terms of actual goods that are sold third party versus first party?

Sure. Third party, we estimate, is about 65 percent. And third and first party is about 35 to 40 percent. OK. And is there more like third party is more from China or do we not know than first party? Well, we Amazon doesn't tell you how much they get from China, but just by looking at what's on their platforms and third party data, irrespective third party or first party, it's estimated that over 70 percent of what's sold on the Amazon dot com platform is from China.

So it's a large, large, large piece of their marketplace. And just to remind everybody, I mean, you study e-commerce, athleisure, off-price retail. This is your world. This stuff is made overseas. Like very little of it is made here in the U.S. Very little. I mean, food is the only thing we may procure locally that Amazon sells, really. Everything else, the bulk of what you buy in retail in the U.S. is made outside of the U.S. It doesn't matter who you are.

What? I don't know. Okay. I'll let him have a moment. You know what's interesting, Poonam? We kind of just laughed that normally when we're talking Amazon, we're all over Amazon Web Services. And it's like, oh, yeah, that retail business. So what an interesting kind of report to go through and what we're focusing on. I do want to point out, though, that AWS reported first quarter sales gained 17% to $29.3 billion in line with analyst estimates. It was the unit's slowest growth in a year.

So it does feel like, I don't know, like what do we get out of that?

I think it's okay. I mean, we're going to see businesses pull forward spend, pull back on spend. There's still a lot of momentum here on the AWS side. And really, you know, while the sales were just in line, the margin was incredible. 39% operating margins, 39.5% roughly. That's huge. Consensus is looking for about 35%. So we do think, you know, this business will ebb and flow

and you'll have high margins, you'll have low margins depending on where they invest. But the long-term potential of AWS is still pretty sizable, and there's a long runway here.

Okay. So if we think about this in the context of what we've heard from other companies thus far, what we heard from Microsoft yesterday, and as a reminder, I mean, you cover the e-commerce, the athleisure, the off-price retail. How do you think about this in terms of the retail world, like the Walmarts of the world, the targets of the world? How does this report sort of inform the way we should be thinking about and investors should be thinking about those other companies?

I think if Amazon's facing these tariff headwinds, so is everyone else, including Walmart, including smaller companies, medium-sized companies. And really, there is no escape from this. Unless we see things calm from here, the 145% tariff that you see on China is sizable. And if that

stays that way, the consumer is going to be paying higher prices. We will see some out-of-stocks on shelves in the coming months, as most companies have halted shipments from China. And it's not going to be an overnight switch to take everything that you make in China to somewhere else. Or even impossible for something, some analysts have said. You said empty shelves. Where are we going to see them? What do you think we'll see empty? I saw empty shelves in a drugstore, but I don't know. It's

That's because everybody stole everything there, Carol. I know. Don't you know how this works? I know it's always a little war perspective. Go ahead, Poon. I'm sorry. Well, you won't see empty shelves on Amazon, but you will see out of stocks. In fact, you know, I was just browsing the web randomly and I started to see some things that just said out of stock. Like, we'll let you know when it comes back. So I think you'll start to see inventory, especially that that comes out of China, that

be put on hold. And we don't know when it'll come back because unless you raise the prices or double them, you're not making the same margin on them. What's the consumer's willingness to pay for this stuff? Because as I was mentioning to Caroline, if we see these price increases across the board, if we see them at Target, if we see them at Walmart, it's not like this is an Amazon specific story. We're going to see this everywhere. At what point does the consumer throw in the towel and say, I'm not going to do this. I'm not going to pay.

I think the consumer will say, I'm not going to pay when prices go up 30, 40%, right? It's going to get more expensive. And if they say they don't pay, it means before they bought 10 things, now they'll buy three things. Where are they buying those three things? Are they going to trade down from a national brand to a private brand?

Are they going to buy more staples that they can, you know, like staple colors that they can reuse, recycle, re-wear, and wear less fashion that goes out of style quickly? There's going to be trade-offs if prices rise materially. That said, we do think that, you know,

People will just switch brands. They'll switch options where they can get things cheaper. We're going into the back half in just a few months. And that's the peak selling season of retail. When you think about toys specifically, right, for the holidays, when you think of back to school. Yeah.

I mean, what do you get your kids if you're not going to get them the Barbie and you're not going to pay, you know, can only get them to Barbie, 30 Barbies, only two dolls. Sorry. No, I'm just repeating, you know what we've heard. Hey, one last question. I will say, though, with the Amazon cart, like when you put them in and like you automatically see the value, like if things start to get more expensive, like you might pull back 30 seconds. Top question you think must be asked on the Amazon call.

How are we weathering this tariff storm that we're going into, especially with three-piece sellers? How are they going to control that Amazon is still an attractive place where value is seen because they don't have a control on prices for everything?

All right. Going to leave it there. Hey, Putnam, thank you so much. Super, super good conversation. Putnam Goyal, Senior Analyst for E-Commerce, Athleisure, Off-Price Retail for Bloomberg Intelligence. Shares of Amazon, by the way, which gave a weaker than expected forecast for operating profit in the current quarter, off its lows, but still down.

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There's no business like small business. Hiscox Small Business Insurance. Is this a negotiation or the new rules of the game? It could be either. It is up to the president how he wants to negotiate. A deal is going to be made with China. Nothing's over yet. There's been a lot of confusion up to now. A 90-day pause.

This year's bear case very quickly becoming the base case.