Amazon gets more fuel for AI race
Summary
Capital spending under CEO Andy Jassy will go up “meaningfully,” but record operating margins driven by retail, cloud and advertising will ease the pain.Big tech is having a spending party this year, and the biggest tech of all won’t be sitting it out. It helps that Amazon.com’s investors have been there before.
The sector’s sales leader posted strong first-quarter results on Tuesday afternoon. Revenue growth beat Wall Street’s targets across nearly all of the company’s segments, while operating income more than tripled year over year to a new high of $15.3 billion, beating analyst estimates by 36%. That put Amazon’s operating margin above 10% for the first time in the company’s history, according to data from S&P Global Market Intelligence.
Investors weren’t fazed by Amazon’s projection for revenue and earnings growth in the second quarter being a bit below Wall Street’s projections. That has become commonplace for a company known to issue conservative forecasts; Amazon’s operating income projection has been below analysts’ consensus forecasts for nine of the past 12 quarters, according to data from FactSet. The more closely watched prediction was for capital spending, which Amazon said Tuesday will go up “meaningfully" this year from its nearly $49 billion in capital expenditures and equipment finance leases last year.
That message was similar to the ones Microsoft, Google and Meta Platforms delivered last week. Those drew a mixed reaction from investors. Meta’s plan to boost this year’s capex by 12% drove the Facebook parent’s stock price down sharply the following day, while Microsoft and Google’s parent Alphabet saw their shares rise after their reports. Amazon’s shares—up by two-thirds over the past 12 months—ended up rising a bit in after-hours trading.
Some credit for that should go to Andy Jassy. Amazon’s chief executive officer spent part of Tuesday’s call detailing the strong demand the company is seeing in its AWS cloud business for generative AI workloads. He said: “We don’t spend the capital without very clear signals that we can monetize it this way." He added that there is still a lot of room to improve on the cost structure of the retail business, where profit margins hit a new high in the quarter.
That strongly suggests Amazon might be past the days in which its infamous “investment modes" crater its profits. Credit can be given to a growing mix of higher-margin businesses such as cloud computing, advertising and subscription-based services. Advertising revenue jumped 24% year over year to $11.8 billion in the recent quarter, and that was with a light ad load for now on its Prime Video streaming service.
AWS revenue rose 17% year over year—up 4 percentage points from the December quarter and the best growth rate that segment has seen in more than a year. The cloud segment delivered record operating profit of $9.4 billion, 25% higher than Wall Street’s estimates. AWS alone is now nearing annual revenue of $100 billion, making it the largest corporate software business next to Microsoft.
The Everything Store needs everything going right to cover AI’s growing bills.
Write to Dan Gallagher at dan.gallagher@wsj.com
