Amazon (AMZN) Q2 2025: AWS Backlog Jumps 25% to $195B, Extending AI Demand Visibility
AWS’s backlog surged 25% to $195 billion, underscoring deep enterprise cloud and AI demand even as infrastructure supply remains a gating factor. Amazon’s core retail and advertising engines outpaced expectations, while international profitability reached new highs. Management’s Q3 guide reflects confidence in operational levers, but investors must calibrate for persistent tariff and power constraints impacting both cost and AWS capacity.
Summary
- Cloud Capacity Limits: AWS demand outstrips supply, with power and chip constraints delaying full revenue realization.
- Retail Margin Expansion: Delivery speed, automation, and Prime Day drove record North American and international profitability.
- AI and Ad Momentum: Generative AI and ad platforms scale rapidly, with new partnerships broadening Amazon’s ecosystem lock-in.
Performance Analysis
Amazon delivered double-digit revenue growth across all major segments, with consolidated sales up 12% year over year. North America and International segments each grew 11%, and both saw substantial operating margin improvement. Notably, international margin climbed to 4.1%, up 320 basis points, marking a nearly 700 basis point gain over ten quarters—a sign that Amazon’s global logistics and inventory placement strategies are bearing fruit.
Amazon Web Services (AWS) posted 17.5% growth with a $123 billion annualized run rate, but segment margins compressed to 32.9% from a record 39.5% last quarter. This was driven by a seasonal spike in stock-based compensation and higher depreciation from ongoing capital investments in data centers and custom silicon. Advertising revenue grew 22%, outpacing retail and contributing meaningfully to profitability, supported by new DSP (demand-side platform) partnerships with Roku and Disney.
- Third-Party Seller Mix: Third-party units hit a record 62% of total, enhancing margin and selection.
- Prime Day Impact: The event set records for sales, items sold, and Prime sign-ups, benefiting both Amazon and independent sellers.
- Outbound Shipping Leverage: Shipping costs rose 6% against 12% unit growth, reflecting improved logistics efficiency.
Capital expenditures remained elevated at $31.4 billion, with AWS-related investments leading as Amazon builds out power and chip capacity to meet AI demand. Management expects this capex pace to persist through year-end.
Executive Commentary
"We have more demand than we have capacity right now. So we could be doing more revenue and helping customers more. And we're working very hard on changing that outcome and how much capacity we have. But it's still like, you know, you look at the business. It's $123 billion annual revenue run rate business, and it's still early."
Andy Jassy, Chief Executive Officer
"Outbound shipping costs were up 6% year-over-year and continued to grow at a meaningfully slower pace than unit growth, which, as I mentioned earlier, was up 12% year-over-year. We're committed to initiatives that further improve our cost structure."
Brian Losowski, Chief Financial Officer
Strategic Positioning
1. AWS Backlog and AI Capacity
AWS’s $195 billion backlog, up 25% year over year, signals robust multi-year demand for cloud and generative AI (artificial intelligence that creates content or code). However, power and chip supply remain bottlenecks, with management expecting gradual improvement over several quarters. The launch of custom silicon like Tranium 2 and NVIDIA-powered instances provides differentiation, but scaling up remains a constraint on revenue conversion.
2. Retail Network Efficiency
Amazon’s regionalized inbound network and automation initiatives—including the deployment of its one millionth robot and DeepFleet AI—drove faster delivery, higher units per box, and lower cost per shipment. Same-day and next-day delivery expanded to over 1,000 smaller U.S. communities, with plans to reach 4,000 by year-end, capturing incremental demand in less-penetrated geographies.
3. Advertising Ecosystem Expansion
Advertising’s 22% growth was fueled by new DSP partnerships with Roku and Disney, giving Amazon exclusive access to 80 million connected TV households and premium inventory. The integration of proprietary retail, streaming, and third-party data strengthens Amazon’s full-funnel ad offering, deepening its moat against traditional and digital ad competitors.
4. International Margin Trajectory
International segment profitability reached new highs, with established markets like the UK, Germany, and Japan now matching U.S. margin profiles. Emerging markets, while still in investment mode, are seeing consistent quarterly improvement in selection, Prime member growth, and logistics efficiency, supporting Amazon’s long-term global scale ambitions.
5. Generative AI and Internal Transformation
Management is aggressively adopting generative AI internally, deploying agents like Kiro to accelerate software development and business process automation. This is expected to reduce time-to-market for new features and enhance employee productivity, further reinforcing Amazon’s culture of operational invention.
Key Considerations
Amazon’s Q2 highlights the benefits of deep operational leverage and ecosystem integration, but also exposes the business to infrastructure and regulatory headwinds. The following factors will shape the investment narrative in coming quarters:
- AWS Supply Constraints: Power and chip shortages are the main gating factors for AWS revenue realization, with management expecting gradual improvement but not full resolution in the near term.
- Tariff Uncertainty: Leadership remains cautious on the ultimate impact of tariffs, noting that forward-bought inventory and seller diversity have thus far shielded consumers from price hikes, but the second half remains unpredictable.
- Retail Margin Sustainability: Structural logistics and automation gains are driving improved profitability, but wage and input cost inflation remain ongoing risks.
- Advertising Platform Synergies: The integration of retail, streaming, and third-party ad inventory is deepening Amazon’s data advantage, but competitive pressure from other digital platforms persists.
Risks
Persistent supply constraints in AWS—particularly power and advanced chips—could limit cloud revenue growth even as backlog expands, leaving Amazon vulnerable to faster-growing competitors. Tariff volatility and regulatory scrutiny introduce unpredictable cost and pricing risks, especially if inventory buffers are depleted. Margin gains in retail and international may prove cyclical if macro or competitive conditions tighten, and continued high capex could pressure free cash flow if growth slows.
Forward Outlook
For Q3 2025, Amazon guided to:
- Net sales between $174 billion and $179.5 billion
- Operating income between $15.5 billion and $20.5 billion
For full-year 2025, management maintained its focus on:
- Capital investment rates in line with Q2
- Pursuing AI infrastructure build-out and expanding delivery network reach
Management cited strong Prime Day momentum, improved delivery speeds, and positive customer response in new geographies as key tailwinds, but flagged ongoing uncertainty around tariffs and AWS supply as watchpoints.
- Prime Day and unit growth support a robust Q3 revenue base
- Tariff and AWS supply scenarios remain embedded in guidance ranges
Takeaways
Amazon’s Q2 demonstrates the power of its ecosystem model, but the path forward depends on resolving infrastructure constraints and navigating macro headwinds.
- AWS Demand Outpaces Supply: Backlog growth and customer wins signal durable cloud and AI adoption, but power and chip shortages cap near-term upside.
- Retail and International Profits Accelerate: Logistics, automation, and third-party mix continue to unlock operating leverage, especially outside the U.S.
- AI and Ad Ecosystem Deepens: Generative AI and ad partnerships are building new moats, but execution on capacity and regulatory fronts remains critical for sustaining momentum.
Conclusion
Amazon’s scale advantages and operational discipline are translating into record backlog, margin gains, and ecosystem expansion, but investors must weigh the duration of AWS supply constraints and the evolving tariff landscape. The company’s strategic bets in AI and logistics position it well for long-term growth, provided it can execute through near-term bottlenecks.
Industry Read-Through
Amazon’s cloud and advertising results highlight broad enterprise and brand demand for integrated digital platforms, with generative AI driving a new wave of infrastructure investment. Power and chip shortages are not unique to Amazon, signaling industry-wide gating factors for hyperscale cloud and AI adoption. Retailers and logistics players face rising pressure to regionalize supply chains and automate fulfillment, while digital ad platforms must contend with Amazon’s deepening data and inventory integration. Investors should watch for sector-wide capex persistence, margin volatility, and regulatory intervention as digital and physical commerce continue to converge.