Amazon cloud sales growth accelerates as group prepares for more AI spending

Demand for artificial intelligence bolstered sales growth in Amazon’s cloud computing division at the start of the year, the company said on Tuesday, as executives laid out plans to spend huge sums to support the fast-growing technology.

The acceleration in sales at Amazon Web Services, a critical profit driver for the ecommerce group, came as businesses spent more on cloud computing services, including new generative AI tools. Overall, AWS is “now at a $100bn annual revenue run rate”, said chief executive Andy Jassy.

AWS sales rose 17 per cent year on year to $25bn during the first three months of 2024, ahead of forecasts for $24.5bn and faster than the 13 per cent rise recorded in the previous quarter.

The division’s margins also widened to 38 per cent, compared with 30 per cent in the previous quarter. Generative AI is “now a multibillion-dollar revenue run rate business for us”, said chief financial officer Brian Olsavsky.

Amazon has been vying with cloud computing rivals Microsoft and Google parent Alphabet for dominance in generative AI, which has fuelled spending on infrastructure, such as data centres, to support the technology that Big Tech hopes will boost their fortunes.

Plans to invest billions in AI have come under Wall Street’s microscope during the latest round of earnings from the tech companies, with investors hoping to see signs of early pay-offs and assess the implications for margins.

Olsavsky said on Tuesday that Amazon expected its capital expenditures this year to increase “meaningfully” compared with $48.4bn in 2023, primarily to support growth in cloud and AI. Amazon invested $14.9bn in property and equipment during the latest quarter, which would be “the low” for the year, he said.

Microsoft last week outlined similar plans to invest billions in the technology, noting that its “near-term AI demand is a bit higher than our available capacity.”

Swami Sivasubramanian, vice-president for data and machine learning at AWS, told the Financial Times that Amazon was not facing the same constraints, adding that it was “rapidly scaling our capabilities”.

Jassy noted that Amazon’s security capabilities provided a compelling reason for businesses with sensitive data to choose AWS, in what appeared to be a veiled dig at rival Microsoft, which is facing growing scrutiny about the security of its systems following a series of incidents, including an attack by Russian state-sponsored hackers that broke into its network.

“Not all the providers have the same track record . . . We have a meaningful edge,” said Jassy.

While Microsoft said last week that AI demand had boosted sales at its Azure cloud platform by 7 percentage points in the first three months of the year, Amazon did not disclose how demand for the technology had contributed to sales at AWS.

In addition to growing the cloud business, Amazon has been on a drive in recent quarters to cut costs and expand margins across its sprawling empire that includes retail, grocery, healthcare and video streaming. Those efforts helped the company more than triple its operating income in the three months to March 31, which rose to $15.3bn compared with forecasts for $11bn.

Executives have sought to make more profitable use of existing businesses, such as its Prime Video streaming service, which launched an ad-supported tier this year. Revenue at the high-margin advertising business overall — which is driven predominantly by adverts linked to its ecommerce segment — rose 24 per cent to $11.8bn during the quarter.

Amazon’s logistics-as-a-service offering — which allows other retailers to use the company’s huge transport, storage and delivery network — was also “growing very significantly”, said Jassy.

Amazon’s overall net sales were $143.3bn, up 13 per cent from the year before and above forecasts for $142.5bn. Net income was $10.4bn, well ahead of forecasts for $8.7bn.

The company’s first US “Big Spring Sale” sales event lifted its retail sales during the quarter, while overall sales benefited from an extra day during the quarter thanks to the leap year. However, guidance for total second-quarter net sales came in below expectations, with Amazon predicting between $144bn and $149bn compared with analysts’ forecasts of $150bn.

Shares in Amazon, which have risen by about 17 per cent this year, rose 1.2 per cent in after-hours trading.