Amazon projects profit that misses estimates, signalling AI costs

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Amazon.com Inc. projected profit that missed analysts’ estimates, suggesting the company is spending more than anticipated to catch up in the race to meet demand for artificial intelligence services.

Operating income will be US$11.5 billion to US$15 billion in the period ending in September. Analysts, on average, projected US$15.7 billion. Third-quarter sales will be US$154 billion to US$158.5 billion, compared with an average estimate of US$158.4 billion.

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Chief financial officer Brian Olsavsky said Amazon spent US$35 billion on capital expenditures such as data centers for its Amazon Web Services cloud unit in first half of year, and will increase that amount in the second half. “We see strong demand in generative AI and nongenerative AI workloads,” he said in a briefing with reporters.

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Chief executive Andy Jassy has been cutting costs and focusing on profitability in Amazon’s main online retail business while spending heavily on artificial intelligence services, which the company has said represent a “multibillion-dollar revenue run rate business.”

In recent weeks, investors have signalled growing impatience with tech companies’ efforts to profit from their massive investments in AI.

Microsoft Corp. on Tuesday posted slowing growth in its Azure cloud-computing arm and said it expected to keep spending heavily on data centres. The next day Meta Platforms Inc. reported upbeat earnings that were expected to buy it time for its AI investments to pay off. Last week, Alphabet Inc. shares sank after it surprised Wall Street with sharply higher costs that overshadowed better-than-expected quarterly sales.

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Olsavasky, speaking about the revenue outlook, said the company is “seeing cautious consumers looking for deals.” Big news events, including the Olympics, appear to have interrupted normal purchasing patterns in the current quarter, making it more difficult to forecast sales, he added.

Still, sales at the Amazon Web Services cloud unit jumped 19 per cent to US$26.3 billion, beating estimates, and the second consecutive period of quarter-over-quarter growth.

“Investors were starting to get acclimated to more consistent profitability in the retail business, but Amazon has always had spurts of investment at the expense of short-term margins and it appears they are planning a spurt into the rest of the year,” said Gil Luria, an analyst at DA Davidson. “The good news is that the payback seems to be there with the acceleration of (AWS) growth to 19 per cent.”

Revenue increased 10 per cent to US$148 billion in the period ended June 30, compared with analysts’ average estimate of US$148.8 billion. Seattle-based Amazon posted an operating profit of US$14.7 billion. Analysts, on average, projected about US$13.6 billion, according to data compiled by Bloomberg.

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Sky Canaves, an analyst at Emarketer, pointed toward said “softer consumer spending” for Amazon’s online business in the quarter, which came between major sales in March and July.

“Healthy consumer spending during these events indicates more strategic and deal-hunting shopping behavior,” Canaves said. “Amazon will have to position its offerings and promotions to take advantage of these trends, such as with the reported plans to launch a Temu-like discount section in time for the holidays this year.”

Amazon’s operating expenses increased 5.2 per cent to US$133.3 billion, less than Wall Street projections. The company’s workforce increased five per cent to more than 1.53 million people.

The shares declined about five per cent in extended trading after closing at US$184.07 in New York. The stock had increased 21 per cent this year through the close.

Bloomberg.com

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