Cloud growth boosts Amazon earnings amid narrowing margins
Amazon’s massive investment in AI has created doubts about future profitability despite record sales growth, following publication of the tech giant’s latest financial results.
According to the Financial Times, in the three months ending June 30, Amazon’s net sales grew by 10% to $148 billion. Although the result was impressive, it missed analysts’ expectations of $148.6 billion. Still, net income multiplied several times, reaching $13.5 billion, while the forecast was $11 billion.
One of the investors’ main focuses was AWS, the company’s cloud computing unit. According to Amazon’s report, AWS sales have grown by 19%, reaching $26.3 billion, slightly higher than analysts’ expectations of $26 billion. Additionally, the growth rate surpassed the 17% rise reported during the previous quarter, indicating a steadily accelerating pace in the sector.
Nevertheless, capital expenditure increased, raising investor concerns. Specifically, it marked a 50% year-over-year rise for the quarter ($17.6 billion in total) in terms of property and equipment funds. These funds were used to improve the company’s logistics and support the AI infrastructure, including data centres and special chips.
Amazon’s CFO, Brian Olsavsky, mentioned that there is likely to be a further surge in capital spending throughout the second half of the year, including considerable investments in cloud infrastructure. He also stated that the company is working on supply chain efficiencies and ensuring that supply meets demand, particularly in AI.
Consequently, it seems that both Amazon, in its approach to investing in AI-related services, and tech giants like Alphabet and Microsoft are walking on thin ice. Such significant investments should eventually yield value, as this pressure is likely to continue in the development stage of several new applications.
While Amazon has not disclosed specific revenue figures for its AI services, the company stated in May that this technology had developed into a “multibillion-dollar revenue run-rate business”. Olsavsky noted that customer demand for Amazon’s AI services is driving cloud sales growth.
Within the e-commerce segment, Amazon continues to concentrate on opportunities to cut costs and improve margins. To this end, the company is restructuring its North American logistics operations to reduce delivery times and costs. As Andy Jassy, Amazon’s chief executive officer, said, these changes allow Amazon to offer even lower-cost items with the low prices that customers have come to expect, which opens up to a population of customers that maybe it wasn’t serving as well.
Advertising remains one of Amazon’s fastest-growing businesses, with sales expanding by nearly 20% to $12.8 billion. Such an increase is notable, although it slightly falls behind the same-time growth of 24% in the second quarter. JPMorgan representatives have noted that advertising is the service’s top expanding segment and one of the most profitable.
However, there seems to be some fluctuation in Amazon’s overall operating margins. After expanding from 4% to 11% at the beginning of 2023, they slightly contracted to 10% in the most recent quarter.
The market responded cautiously to the results – Amazon’s shares dropped as much as 8% in after-hours trading. It seems that a similar reaction occurred following other tech giants’ financial reports in recent weeks, as investors were also quite sceptical about their large investments in AI.
While Amazon continues to invest heavily in future technologies and infrastructure, the challenge is to preserve investor confidence today and ensure steady growth in rapidly changing markets.
(Photo by Towfiqu barbhuiya)
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