*

Shares drop more than 3% after hours

*

Cloud computing results lag big gains from Alphabet,

Microsoft ( MSFT )

*

Cloud unit margins narrow to 32.9% from 35.5% a year

earlier

(Adds analyst comment in paragraph 5)

By Deborah Mary Sophia and Greg Bensinger

July 31 (Reuters) - Amazon.com ( AMZN ) forecast

third-quarter sales above market estimates on Thursday but

failed to live up to lofty expectations for its Amazon Web

Services cloud computing unit after rivals handily beat

expectations.

Shares fell by more than 2% in after-market trading after

finishing regular trading up 1.7% to $234.11. Both Google-parent

Alphabet and Microsoft ( MSFT ) posted big cloud

computing revenue gains earlier this month.

AWS profit margins also contracted. Amazon ( AMZN ) said they were

32.9% in the second quarter, compared with 39.5% in this year's

first quarter and 35.5% a year ago. The second-quarter margin

results were at their lowest level since the final quarter of

2023.

AWS, the cloud unit, reported a 17.5% increase in revenue to

$30.9 billion, edging past expectations of $30.77 billion.

After strong growth from Microsoft ( MSFT ) and Google, "AWS is

lingering at 17% growth," said Gil Luria, a D.A. Davidson

analyst. "That is very disappointing, even to the point where if

Microsoft's ( MSFT ) Azure continues to grow at these rates, it may

overtake AWS as the largest cloud provider by the end of next

year."

The company expects total net sales to be between $174.0

billion and $179.5 billion in the third quarter, compared with

analysts' average estimate of $173.08 billion, according to data

compiled by LSEG.

Blockbuster cloud revenue growth at Microsoft ( MSFT )

and Alphabet's Google raised expectations for AWS, the

world's largest cloud provider.

Both Microsoft ( MSFT ) and Alphabet cited massive demand for their

cloud computing services to boost their already huge capital

spending, but also noted they still faced capacity constraints

that limited their ability to meet demand.

AWS represents a small part of Amazon's ( AMZN ) total revenue,

but it is a key driver of profits, typically accounting for

about 60% of Amazon's ( AMZN ) overall operating income.

While Amazon ( AMZN ) has poured billions into AI infrastructure,

analysts have said the lack of a strong AI model from AWS is

causing some concerns that the company could be trailing rivals

in AI development, analysts said.

President Donald Trump's tariffs have dampened the U.S.

retail industry, leaving major retailers and consumer goods

companies scrambling to protect their margins or resort to price

increases, all while ensuring consumer demand remains intact.

Trump has said the levies will bring manufacturing power and

jobs back to the U.S.

Investors have been closely watching Amazon's ( AMZN ) e-commerce

unit for any signs that tariff-related uncertainty has dashed

consumer confidence. U.S. data showed consumer spending rose

moderately in June.

Analysts had said Amazon's ( AMZN ) focus on low prices, quick

delivery and the sheer number of product categories has helped

cement its position as the No. 1 e-commerce retailer for U.S.

consumers, giving it an edge over rivals.

Amazon ( AMZN ) has said it was pushing suppliers to pull forward

inventories to ensure supply and keep prices as low as possible.

Still, prices for goods made in China and sold on Amazon.com ( AMZN )

have been rising faster than overall inflation, Reuters reported

last month.