Amazon stock gradually rises as cost-cutting measures and AI investments boost AWS profits

Shares of Amazon.com Inc. rose slightly today after the online retail giant reported better-than-expected earnings, citing strong growth in its cloud and advertising businesses as key reasons for today’s strong results. .

Amazon reported first-quarter earnings (excluding stock-based compensation and other costs) of 98 cents per share, easily beating Wall Street’s expectations of 83 cents per share, and sales were 13% year-over-year. This amount increased to $143.3 billion, exceeding the forecast of $142.5 billion. .

Meanwhile, the company’s operating profit rose more than 200% to $15.3 billion, far outpacing sales growth and showing that its focus on cost-cutting and other efficiency measures is paying off. . Net income also more than tripled from the same period last year, increasing to $10.4 billion.

Looking ahead, the company expects profitability to continue to rise, albeit at a slower pace, with operating income expected to be between $10 billion and $14 billion. Second-quarter sales are expected to be between $144 billion and $149 billion, representing growth of 7% to 11% and just short of Wall Street’s sales target of $150.1 billion.

Amazon’s improved profitability was due in part to the strong performance of its cloud computing unit, Amazon Web Services, with revenue up 17% year over year to $25 billion, compared to TheStreet’s forecast for sales of $24.5 billion. exceeded the dollar. AWS growth has slowed over the past year as companies cut their cloud computing budgets, but it continues to beat expectations.

Now, Amazon says cost optimization is tapering off, in part due to increased interest in generative artificial intelligence, which is becoming a key element of the company’s cloud products.

AWS has also improved its profitability, with high profit margins resulting in operating income of $9.42 billion, accounting for 62% of the company’s total. Additionally, AWS operating margin expanded to 37.6%, the highest since 2014.

This growth means AWS has reached an important milestone in becoming a $100 billion-a-year business for Amazon, said Sarbjeet Johar, an independent technology analyst and go-to-market strategist.

AWS’ investments in AI also appear to be paying off, with generative AI now accounting for more than $1 billion in annual revenue. “We’ve already amassed a multi-billion dollar revenue run rate,” Amazon CEO and former AWS chief Andy Jassy (pictured) said on a conference call with analysts. .

During the quarter, the company invested $2.75 billion in generative AI startup Anthropic PBC. Anthropic PBC also happens to be a major AWS customer, using the company’s cloud infrastructure to host, train, and run its AI models. AWS CEO Adam Selipsky justified the investment at the time by saying Anthropic had built some of the “market-leading models” in many areas.

Amazon also reported strong growth in its advertising business, with revenue up 24% to $11.8 billion, slightly ahead of analysts’ expectations of $11.7 billion. The company recently introduced advertising to its Amazon Prime Video streaming service, which many analysts believe could lead to significant revenue increases over the long term.

The advertising business is becoming increasingly important to Amazon, and its growth is outpacing AWS. This is in line with industry-wide trends, with Google parent company Alphabet, Metaplatforms, Snap and others posting better-than-expected ad revenue growth last week.

Amazon’s earnings improved as a result of extensive cost-cutting measures introduced by Jassy last year. The company doubled down on its most profitable businesses, while becoming more disciplined with its spending. That’s evidenced by Amazon’s operating margins reaching double digits for the first time in the company’s history, rising to 10.7% in the quarter from 7.8% three months earlier.

“Advertising is growing and AWS is doing well,” Amazon Chief Financial Officer Brian Olsabsky said during an earnings call. “A lot of that is driven by cost control and top-line revenue growth, as well as the company’s overall low-cost structure.”

Cost-cutting measures include thousands of layoffs, with more than 27,000 employees out of work starting in late 2022. Those cuts continued into this year, as hundreds of employees recently lost their jobs in Amazon’s healthcare and cloud businesses. Additionally, Amazon’s technology and infrastructure costs decreased slightly year-over-year, with sales and marketing costs decreasing by 5% and general and administrative expenses decreasing by 10%.

Amazon’s investments in generative AI are the main exception to this trend, and Olsavsky said on the conference call that the company will continue to pour more money into this part of its business. In particular, it continues to build out its computing infrastructure for generative AI, which will likely lead to a “significant increase” in capital spending this year, he added. This is in line with industry-wide trends, as Amazon’s rivals Microsoft and Google are also accelerating their investments in generative AI infrastructure.

“Amazon is focused on execution and fat reduction,” Dzhokhar said. “We are working hard to streamline and communicate AI messaging to our customers, partners, and markets, and more work is needed in this area.”

One disappointment for investors may be that Amazon once again declined to pay a quarterly dividend, even though its cash and cash equivalents increased from $54.3 billion to $73.9 billion at the end of the quarter. Alphabet Inc. announced last week that it would begin paying a 20 cents per share dividend to investors, following Meta’s announcement in February that it would pay 50 cents per share. was. Amazon is now the only Internet company with a market capitalization of trillions of dollars that does not pay regular dividends to shareholders.

Photo: Robert Hoff/SiliconANGLE