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Amazon became the latest Big Tech company to draw the ire of Wall Street on Thursday as it reported higher capital spending and shrinking margins even as sales at its closely watched cloud computing business accelerated.
Net sales across the company rose 10 per cent to $148bn, missing analysts’ estimates for $148.6bn. Net income for the three months to June increased to $13.5bn, well ahead of analysts’ forecasts for $11bn.
But Amazon shares, which have risen more than a third in the past 12 months, slipped as much as 6 per cent in after-hours trading in New York, a similar reaction to recent results from Microsoft and Google parent Alphabet that reflected higher AI-related costs.
Sales at the Seattle-based company’s cloud division, Amazon Web Services, rose 19 per cent in the three months to June 30 to $26.3bn, compared with analysts’ forecasts for sales of $26bn.
However, margins at the unit, which is a core driver of the ecommerce group’s profits, narrowed 2 percentage points to 36 per cent, as Amazon reported a 50 per cent increase in company-wide capital spending to $17.6bn during the quarter compared with the same period last year. That spending spanned its logistics network and the infrastructure that underpins AI, such as data centres and chips.
In a signal that lofty spending may eat into profits, Amazon said operating income for the third quarter would be between $11.5bn to $15bn, below analysts’ expectations for $15.1bn.
Big Tech groups including Amazon and rivals Microsoft and Google parent Alphabet have come under intense scrutiny from investors looking for evidence that the massive investments being poured into AI technology and infrastructure are starting to pay off.
Amazon’s chief financial officer Brian Olsavsky on Thursday said he expected capital spending to be higher in the second half of the year, most of which would be funnelled into cloud infrastructure. The “key” was ensuring supply matched demand, he said, adding the company’s focus was on “getting the supply”.
This week, Microsoft also unveiled a surge in quarterly capital spending designed to support the build out of AI infrastructure in order to meet growing demand that the company said was outstripping its capacity.
Although Amazon has not broken out the contribution from generative AI to its AWS sales, the company in May said the technology had grown into “a multibillion-dollar revenue run-rate business for us”. Olsavsky on Thursday said customer demand for Amazon’s AI services was “amplifying” cloud sales.
The group has sought in recent quarters to cut costs and boost margins across its vast empire that spans ecommerce, healthcare, video streaming and more. That has included a reorganisation of its sprawling North American logistics business designed to locate goods closer to customers in order to reduce delivery times, cut costs and improve margins.
Amazon has also sought to grow its ads business, which largely comprises promotions on its ecommerce websites, and launched an ad-supported tier on its Prime Video streaming service this year.
Amazon’s advertising sales jumped 20 per cent to $12.8bn in the three months to June, though that was a slower pace to the 24 per cent rise recorded in the previous quarter.
JPMorgan analysts in June said advertising was “Amazon’s fastest-growing revenue stream and also one of its highest-margin businesses”.
Although Amazon’s company-wide margins expanded to 11 per cent at the start of this year from 4 per cent at the start of 2023, they slipped back to 10 per cent in the three months to June.
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