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Amazon became the latest big technology company to disappoint Wall Street on Thursday, reporting rising capital spending and narrowing profit margins despite accelerating sales at its high-profile cloud-computing business.
The Seattle-based company’s shares have risen by more than a third over the past 12 months but fell as much as 8% in after-hours trading in New York, reflecting a reaction to recent earnings from Microsoft and Google-parent Alphabet.Investors are watching the rise in artificial intelligence spending cautiously, searching for signs that the billions of dollars being pumped into the technology will generate healthy profits.
Overall Amazon’s net sales rose 10% to $148 billion in the three months ended June 30, below the $148.6 billion that analysts had expected. Net income rose to $13.5 billion, well above the $11 billion that analysts had expected.
Revenue from the company’s closely watched cloud division, Amazon Web Services, rose 19% to $26.3 billion, beating analysts’ sales expectations of $26 billion, accelerating from a 17% increase in cloud revenue in the previous quarter.
But margins in the division, Amazon’s core profit driver, fell 2 percentage points to 36%, and the company reported a 50% increase in real estate and equipment investments to $17.6 billion from the same period last year, including spending on its logistics network and infrastructure such as data centers and chips that support AI.
Amazon said it now sees third-quarter operating profit of $11.5 billion to $15 billion, below analysts’ expectations of $15.1 billion, as heavy spending could eat into profits.
Big tech companies including Amazon, rival Microsoft and Google-parent Alphabet are under intense scrutiny from investors looking for evidence that the huge investments they are pouring into AI technology and infrastructure are starting to pay off.
Amazon Chief Financial Officer Brian Olsavsky said Thursday that the company expects capital spending to increase in the second half of the year, with most of it going to cloud infrastructure. “The key” is making sure supply and demand are aligned, he said, adding that the company’s focus is on “ensuring supply.”
Microsoft also announced plans this week to ramp up quarterly capital spending to help build out its AI infrastructure to meet growing demand that it says is outstripping the company’s capabilities.
Amazon hasn’t disclosed how much generative AI contributes to AWS revenue, but said in May that the technology has grown into “a multi-billion-dollar revenue business for our company.” Olsavsky said customer demand for Amazon’s AI services is “amplifying” cloud revenue.
The group has been seeking in recent quarters to cut costs and boost margins across its vast empire that spans e-commerce, healthcare and video streaming, including a restructuring of its sprawling North American logistics business designed to move goods closer to customers in an effort to speed delivery times, cut costs and boost profit margins.
Olsavsky said consumers are “being more cautious with their spending” and seeking cheaper products, but the volume of goods purchased remains strong. CEO Andy Jassy said making it cheaper for Amazon to fulfill orders allows it to stock lower-priced items that it wouldn’t normally be able to offer “economically.”
Amazon is also looking to grow its advertising business, which mainly consists of promotions on its e-commerce website, and this year launched an ad-supported tier to its Prime Video streaming service.
The company’s advertising revenue rose 20% to $12.8 billion in the third quarter, slowing from a 24% increase in the previous quarter.
JPMorgan analysts said in June that advertising is “Amazon’s fastest-growing revenue stream and one of its most profitable businesses.”
Amazon’s company-wide profit margins expanded to 11% at the start of this year from 4% at the start of 2023, but fell again to 10% in the three months through June.
