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Amazon to ramp up capex for AWS and AI

Jingyue Hsiao, DIGITIMES Asia, Taipei 0

Credit: AFP

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.

Amazon financial services (US$m)

Financial

2Q23

3Q23

4Q23

1Q24

2Q24

YoY for 2Q24 (%)

Sales

134,383

143,083

169,961

143,313

147,977

10.12

Gross profit

65,010

68,061

77,408

70,680

74,192

14.12

Operating income

7,681

11,188

13,209

15,307

14,672

91.02

Net income

6,750

9,879

10,624

10,431

13,485

99.78

Source: Amazon, August 2024

Amazon sales by business (US$m)

Business

2Q23

3Q23

4Q23

1Q24

2Q24

YoY for 2Q24 (%)

Online Stores

52,966

57,267

70,543

54,670

55,392

4.58

Physical Stores

5,024

4,959

5,152

5,202

5,206

3.62

Third-Party Seller Services

32,332

34,342

43,559

34,596

36,201

11.97

Advertising Services

10,683

12,060

14,654

11,824

12,771

19.55

Subscription Services

9,894

10,170

10,488

10,722

10,866

9.82

Amazon Web Services (AWS)

22,140

23,059

24,204

25,037

26,281

18.7

Other Services

1,344

1,226

1,361

1,262

1,260

-6.25

Source: Amazon, August 2024

Amazon sales by region (US$m)

Region

2Q23

3Q23

4Q23

1Q24

2Q24

YoY for 2Q24 (%)

North America

82546

87887

105514

86341

90033

9.07

International

29,697

32,137

40,243

31,935

31,663

6.62

Amazon Web Services (AWS)

22,140

23,059

24,204

25,037

26,281

18.7

Source: Amazon, August 2024