Amazon predicts cloud growth will gain steam as earnings bounce back

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Amazon predicts cloud growth will gain steam as earnings bounce back

2 February 2024 Technology & Digitalization 0

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Amazon’s bumper holiday season and forecasts for accelerating cloud growth boosted its shares as earnings rebounded from last year.

Sales at Amazon’s closely watched cloud computing division AWS, a critical profit driver for the business, rose 13 per cent to $24.2bn in the three months to December, edging up from the 12 per cent growth reported last quarter.

A prolonged slowdown in cloud growth came as customers looked for ways to cut costs, but the big cloud computing providers — Amazon, Microsoft and Google — are now eyeing demand for generative AI as a way to kick-start sales. Despite the increase, AWS sales growth remains far below the 40 per cent reported at the end of 2021.

The acceleration seen at the end of the year would “continue into 2024” as the pace of customer cost-cutting slows, said Amazon chief financial officer Brian Olsavsky. He said the company was seeing “significant interest” in its generative AI services, but declined to disclose what impact that has had on cloud growth. 

Revenue from generative AI already amounted to “a pretty big number” though it was “much smaller than it will be in the future”, when it would reach “tens of billions”, said chief executive Andy Jassy.

Amazon shares, which are up about 50 per cent in the past 12 months, rose as much as 9 per cent after the earnings report on Thursday.

Meanwhile, improving margins at Amazon’s vast North American business, which includes its online store, helped push it back to an operating profit from losses a year ago. That was the result of major cost cutting efforts, a reorganisation of Amazon’s huge US logistics network and resilient consumer spending during the busy holiday season.

“This fourth quarter was a record-breaking holiday shopping season and closed out a robust 2023 for Amazon,” said Jassy.

The company has sought to maximise the logistics network it built out during the pandemic — for example by rolling out its Buy with Prime service that allows merchants selling on other platforms to utilise its delivery service.

Amazon has also been expanding its high-margin advertising business, including by introducing ads to its Prime Video streaming service. Advertising revenue growth accelerated to 26 per cent during the final quarter of 2023, stripping out the impact of currency moves.

Analysts have been looking for signs in Big Tech earnings this week that huge investments into generative artificial intelligence will translate into higher sales and profits, and whether the technology will accelerate cloud growth at rivals Microsoft and Google.

One crucial area of focus is how Amazon compares with early mover Microsoft, which has captured much of the excitement around the technology. “Amazon remains an obvious number two in generative AI,” Deutsche Bank analysts said in January.

Amazon rolled out Amazon Q, a rival to Microsoft’s generative AI assistant, last year alongside a suite of AI services and hardware, and on Thursday unveiled an AI shopping assistant that will answer customer questions and make recommendations. However, the company has not disclosed customer numbers.

Microsoft, the number two cloud-computing provider, this week said demand for AI services had boosted its Azure cloud platform revenues in the latest quarter more so than it had done during the prior three months.

Like Microsoft and Google, Amazon said this week that capital spending would rise in 2024 to support the growth of AI infrastructure. Amazon’s capital investments in 2023 fell to $48.4bn, a reduction of more than $10bn year over year, as a result of lower logistics-related spending, said Olsavsky.

Despite a spate of recent lay-offs that followed deeper cuts last year, Olsavsky said most Amazon teams were “looking to hold the line on headcount”. 

The Seattle-based company reported a rebound in pre-tax earnings, which climbed to $13.2bn compared with $2.7bn in the same period in 2022, well ahead of analysts’ expectations for $10.4bn. Overall, Amazon’s revenue rose 14 per cent to $170bn, ahead of analysts’ forecasts for $166.3bn.

Looking ahead to the first quarter of 2024, Amazon said it expected revenues of between $138bn-$143.5bn and pre-tax earnings of between $8bn-$12bn, broadly in line with analysts’ forecasts.