Amazon's Narrowed Margins Overshadow Cloud Computing's Growth Reacceleration

Amazon.com Inc AMZN reported its second quarter results. Although its financials showed AWS growth has reaccelerated, this piece of good news was overshadowed by increased capital spending that pressured margins. Amazon has joined Google-parent Alphabet GOOGGOOGL and Microsoft Corporation MSFT in their AI spending spree.

Second Quarter Highlights

For the quarter ended on June 30th, Amazon reported revenue grew 10% YoY to $148.0 billion, which came short of LSEG’s $148.56 billion consensus estimate.

By inserting ads into Prime Video, Amazon fueled its advertising revenue that went up as much as 20% to $12.77 billion, but this was still short of StreetAccount’s consensus estimate of $13 billion. This is a slowdown compared to the previous quarter when Amazon recorded YoY growth of 24%. Undoubtedly, advertising is Amazon’s fastest-growing revenue stream. It is also one of its highest-margin businesses. 

Amazon touted the growth of its core profit driving segment, AWS, whose sales surged 19% to $26.28 billion, with operating income of $9.3 billion greatly exceeding that of last year’s comparable quarter when it amounted to $5.4 billion. AWS growth accelerated from previous quarter’s 17% while Microsoft reported its cloud computing unit, Azure, slowed from 31% reported in the previous quarter to 29%. Although Amazon has not revealed the exact contribution of generative AI to AWS’s top line, it did state back in May that the developing technology has grown into a multi-billiion dollar revenue run-rate business. But, the segment’s margins shrinked by 2 percentage points to 36%, as they were squeezed by investments in property and equipment that rose 50% to $17.6 billion. After pulling back after the pandemic, Amazon went back to increasing its capital spending.

Net income doubled to $13.5 billion, $1.26 per diluted share, topping analyst estimates for EPS of $1.03 and for net income of $11 billion.

Third Quarter Guidance

Amazon guided for current quarter sales to range between $154 billion and $158.5 billion, which translates to year-over-year growth between 8% and 11%. Operating income outlook is in the range between $11.5 billion and $15.0 billion, which is a further signal that the AI spending spree threatens to eat into profits. 

The need for evidence to justify the AI spending spree.

Like its tech peers, Microsoft and Google-parent Alphabet, Amazon needs to prove its hefty AI investments are worth the immense cost. Earlier this week, Microsoft also revealed a surge in capital spending for the sake of building its AI infrastructure. Covering all cloud and AI-related spending, Microsoft revealed its capital expenditure surged almost 80% YoY to $19 billion. As for the 2024 fiscal year, Microsft reported full year capital expenditure of $55.7 billion, adding that it will continue to rise next year.

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