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Amazon (AMZN -4%) is heading a bit lower today despite reporting nice EPS upside with its Q4 earnings report last night, its largest EPS beat in three years. The holiday quarter is Amazon's largest sales quarter of the year, so it's important. Revenue rose 10.5% yr/yr to $187.79 bln, which was in-line. However, Amazon faced a much steeper than expected FX headwind, about $900 mln, whereas prior guidance anticipated only $200 mln. AMZN would have exceeded the top end of guidance.

• The FX headwind also explains why the Q1 revenue guidance at $151.0-155.50 bln was a good bit lower than analyst expectations. This guidance seems to be the main reason for the stock being lower today. But once we have the FX explanation, it does not look as bad. We also think that's why the stock is down only modestly. Q4 operating income was a record $21.2 bln vs prior guidance of $16-20 bln. AMZN also guided to healthy Q1 operating income of $14-18 bln.
• Let's start with the Stores segment. AMZN saw growth of 9.5% in North America and 7.9% (+9% CC) in the international segment. Worldwide paid units grew 11% yr/yr as its focus on low prices, broad selection, and fast shipping continues to resonate with customers. AMZN benefitted from record-setting events during its Prime Big Deal Days in October and Black Friday and Cyber Monday around Thanksgiving.
• Turning to AWS, segment sales increased 19% yr/yr (+19% CC) to $28.8 bln with segment operating margin of 36.9% vs 29.6% a year ago. We were a bit nervous for AMZN heading into this report given that its peer Microsoft Azure posted growth at the low end of guidance. However, this was AWS's third consecutive quarter with +19% CC yr/yr growth, so we did not see any drop-off.
• Importantly, Azure noted some weakness in its non-AI business. However, AMZN said that AWS continued to see growth in both Generative AI and non-Generative AI offerings as companies turn their attention to newer initiatives, bring more workloads to the cloud, restart or accelerate migrations from on-premise to the cloud, and tap into the power of Generative AI. Also, AMZN did not seem overly worried about DeepSeek. AMZN said that virtually all the big Generative AI apps are going to use multiple model types and different customers are going to use different models for different types of workloads.
• Turning to Advertising Services, segment revenue grew +18% CC to $17.29 bln. This continues a downward trend from recent quarters: +19% CC in Q3, +20% CC in Q2, +24% CC in Q1, +26% in Q4. However, this segment's base is getting larger. Advertising remains an important contributor to profitability in the North America and International segments. Also, the $17.3 bln comps at a $69 bln annual revenue run rate, more than double what it was just four years ago at $29 bln.

Overall, we think AMZN's Q4 report was quite good. We understand investor concerns about the Q1 guidance, however, given that much of it is FX-related, that does not concern us as much. We think the stock action is also playing a role in today's pullback. The stock has been quite impressive since early August, up about 57% from its lows. Sentiment was quite positive heading into this report, so any little ding on guidance is triggering some profit taking.