Ai Drives AWS Growth

Amazon's cloud computing arm, Amazon Web Services (AWS), has reported an accelerated growth in sales at the start of the year, with a significant push from rising demand for artificial intelligence (AI). AWS's performance is particularly notable, with Andy Jassy, Amazon's chief executive, announcing that the division has now reached a $100 billion annual revenue run rate. In the first quarter of 2024, AWS sales rose by 17% year-on-year to $25 billion, outperforming expectations and marking an increase from the 13% growth seen in the previous quarter.

This surge in AWS's sales, a crucial profit driver for Amazon, is attributed to increased spending by businesses on cloud computing services, which now prominently include new generative AI tools. In terms of profitability, the division's margins have also shown improvement, expanding to 38% from 30% in the preceding quarter, according to Brian Olsavsky, Amazon's chief financial officer. He pointed out that generative AI has become a multi-billion-dollar revenue contributor for AWS.

The competition in generative AI technology has become a central battleground for cloud computing giants like Microsoft and Google's parent company Alphabet, all vying for dominance. This competition has spurred significant investments in infrastructure, such as data centers, which are essential to support the burgeoning technology. The strategic importance of these investments has drawn close scrutiny from Wall Street, especially during this earnings season, as investors look for early returns and gauge the implications for profit margins.

Olsavsky disclosed on Tuesday that Amazon's capital expenditures for the current year would increase "meaningfully" over the $48.4 billion spent in 2023. This ramp-up in investment is primarily to bolster the company's cloud and AI capabilities. In the latest quarter alone, Amazon invested $14.9 billion in property and equipment, which Olsavsky referred to as "the low point" for the year.

Amid these investments, Microsoft recently announced similar expansion plans, driven by AI technology, acknowledging that its "near-term AI demand is a bit higher than our available capacity." In contrast, Swami Sivasubramanian, AWS's vice-president for data and machine learning, informed the Financial Times that Amazon is not facing similar constraints and is "rapidly scaling our capabilities."

Jassy also emphasized Amazon's superior security features as a key selling point for AWS, particularly for businesses handling sensitive data. This point seems to be a veiled critique of rival Microsoft, which has faced increased scrutiny over security following a series of incidents, including an intrusion by Russian state-sponsored hackers.

While Microsoft credited a surge in AI demand for boosting sales at its Azure cloud platform by 7 percentage points in the first quarter of the year, Amazon has not detailed the specific impact of AI demand on AWS's sales.

Beyond enhancing its cloud operations, Amazon has been aggressively working to cut costs and expand margins across its extensive business portfolio, which includes sectors like retail, grocery, healthcare, and video streaming. These efforts have enabled the company to more than triple its operating income to $15.3 billion for the three months ending March 31, far surpassing the $11 billion forecasted.

The company's executives are also making strides to monetize existing services more effectively, such as the Prime Video streaming service, which introduced an ad-supported tier this year. Driven largely by ads linked to its e-commerce operations, Amazon's high-margin advertising business saw a 24% increase in revenue to $11.8 billion during the quarter.

Additionally, Amazon's logistics-as-a-service offering, which allows other retailers to utilize Amazon's vast transport, storage, and delivery network, is also seeing significant growth, according to Jassy.

Overall, Amazon's net sales climbed to $143.3 billion, a 13% increase from the previous year and above the $142.5 billion forecasted. Its net income for the quarter was a robust $10.4 billion, well ahead of the $8.7 billion expected. Despite this strong performance, Amazon's guidance for total net sales in the second quarter was slightly cautious, projecting between $144 billion and $149 billion, below analysts' expectations of $150 billion. After these results, Amazon's stock rose by 1.2% in after-hours trading.