Amazon to ramp up capex for AWS and AI

Amazon's AWS division continued to gain momentum despite reporting lower-than-expected revenue. The company plans to boost its capital expenditures to accommodate the growing demand for AI-driven cloud services.

Amazon released its latest financial results, reporting net sales of US$147.98 billion, an 11% increase year-over-year and lower than Bloomberg estimates of US$148.78 billion. Operating income surged to US$14.67 billion, up 91% from the previous year, with the operating margin rising to 9.9% from 5.7% a year earlier.

According to Amazon CEO Andy Jassy, AWS revenue growth accelerated from 17.2% in the first quarter to 18.8% in the second quarter. Over the past 18 months, AWS has introduced more than twice as many machine learning and generative AI features as all other major cloud providers combined. Jassy highlighted that as businesses modernize infrastructure and adopt cloud solutions and generative AI, AWS remains the top choice for customers.

Amazon CFO Brian T. Olsavsky explained that the robust AWS operating income margin in the second quarter, which was in the mid-30% range, resulted from cost cuts, improved efficiency, and a change in the estimated useful life of servers, which added 200 basis points to the margin compared to last year. He noted, however, that margins can vary from quarter to quarter.

For the third quarter of 2024, net sales are projected to range between US$154.0 billion and US$158.5 billion, an increase of 8% to 11% year-over-year. This forecast accounts for an estimated negative impact of about 90 basis points due to foreign exchange rates. Operating income is anticipated to be between US$11.5 billion and US$15.0 billion, compared to US$11.2 billion in the same period last year.

Increasing capex

Amazon said it will prioritize heavy spending on artificial intelligence over short-term profits. During the earnings call, Olsavsky said that capital investments, defined as capex plus equipment finance leases, totaled US$30.5 billion for the first half of the year, adding that capital investments are expected to increase in the second half, primarily to support the rising demand for AWS infrastructure, driven by both generative AI and non-generative AI workloads.

According to Bloomberg, Gil Luria, an analyst at DA Davidson, noted that Amazon has a history of investing heavily at the cost of short-term margins and is expected to continue this trend for the rest of the year. He highlighted that a significant portion of this investment is directed towards the AWS cloud unit, which reported a 19% sales growth in the second quarter, exceeding analysts' projections.

AI and in-house chip investment

During the earnings call, Jassy addressed concerns about the company's investment strategy in AI and custom silicon. Jassy emphasized that AWS employs a sophisticated system for predicting capacity needs, effectively balancing investment to avoid overinvestment and underinvestment. Although AI is a relatively new field, AWS has adapted its models to accommodate the unique demands of AI workloads, noting that the current demand for AI capacity exceeds supply.

On the topic of custom silicon, Jassy highlighted AWS's track record with custom chips like the Graviton CPUs, which have significantly enhanced price performance for customers. AWS has also introduced specialized chips for machine learning, such as Trainium and Inferentia, in response to customer needs for improved price performance and to address supply constraints in the GPU market. Jassy anticipates these custom chips will deliver strong returns on investment, similar to the Graviton series.

Source: Amazon, August 2024

Source: Amazon, August 2024

Source: Amazon, August 2024