Amazon's cloud growth shines, but margins narrow

Amazon's latest earnings report paints a mixed picture. While its cloud computing business, Amazon Web Services (AWS), continues to impress with strong sales growth, rising capital expenditures are squeezing profit margins. This echoes concerns across the tech industry, where investors are scrutinizing hefty investments in artificial intelligence (AI) and related infrastructure.

Key Points:

Cloud Strength: AWS sales jumped 19% year-over-year to $26.3 billion, exceeding analyst expectations.
Profit Squeeze: However, margins at AWS narrowed by 2 percentage points, reflecting a 50% increase in investments in property and equipment, including data centers and chips crucial for AI.
High Spending Continues: Amazon expects even higher capital spending in the second half of 2024, primarily focused on cloud infrastructure.
Investor Concerns: This aggressive spending raises concerns about profitability as investors seek proof that hefty investments in AI will pay off.
Focus on Supply: CFO Brian Olsavsky emphasizes the need to meet surging customer demand for cloud services by ensuring sufficient supply.
Echoes Industry Trend: Similar spending trends are seen at Microsoft, which also reported a surge in AI-related infrastructure investments.
AI Growth: While Amazon hasn't disclosed AI's specific contribution to AWS revenue, it confirmed AI has become a multi-billion dollar business.
Overall Margins: Despite company-wide margins expanding earlier this year, they dipped back to 10% in the latest quarter.

Amazon's Balancing Act:

The company is juggling multiple priorities:

Cloud Growth: Fueling the high-growth AWS business requires significant infrastructure investment.
Cost Control: Simultaneously, Amazon is working to cut costs and boost margins across its diverse businesses, including logistics and advertising.
Meeting Consumer Needs: CFO Olsavsky acknowledges cautious consumer spending, prompting Amazon to offer more affordable products.
Advertising Push: Amazon continues to grow its advertising business, which boasts high margins but saw a slight growth slowdown compared to the previous quarter.