Amazon's AI Investment Surge Drives AWS Growth and Future Strategy

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.

We're investing a lot in AI and we're going to keep doing it - Amazon CEO Andy Jassy's message to Wall Street

An unusually downbeat Wall Street reaction to the results announcement from Amazon this week, despite the AWS cloud arm turning in 18.8% year-on-year growth to hit $26.3 billion in revenue. But overall, the company's total revenue of $148 billion missed analyst expectations, while there was also another warning of increased CapEx spending to come, focused on AWS and AI. Q2 AWS operating income was $9.3 billion, up from $4 billion a year ago. CEO Andy Jassy was also quick to point out that AWS growth rate of 18.8% in Q2 was sequentially up on Q1's rate of 17.2%, noting: We're continuing to see three macro trends drive AWS growth. First, companies have completed the significant majority of their cost optimization efforts and are focused again on new efforts. Second, companies are spending their energy again on modernizing their infrastructure and moving from on-premises infrastructure to the cloud. This modernization enables builders to save money, innovate at a more rapid clip, and drive productivity in most companies' scarcest resources, developers. This is the flip I've talked about in the past, where the vast majority of global IT spend today is on-premises, and we expect that to keep inverting over time. With the broadest functionality, the strongest security and operational performance, and the deepest partner ecosystem, AWS continues to be customers' partner of choice and the biggest beneficiary of this flip from on-premises to the cloud. And third, builders and companies of all sizes are excited about leveraging AI. On AI, Jassy said the firm now has "a multi-billion dollar revenue run rate despite it being such early days". He added: At the heart of this strategy is a firmly-held belief, which we've had since the beginning of AWS, that there is not one tool to rule the world. People don't want just one database option or one analytics choice or one container type. Developers and companies not only reject it, but are suspicious of it. They want multiple options for flexibility and to use the best tool for each job to be done. The same is true in AI. You saw this several years ago when some companies tried to argue that TensorFlow would be the only machine learning framework that mattered, and then PyTorch and others overtook it. The same one model or one-chip approach dominated the earliest moments of the generative AI boom, but we have a lot of data to suggest this is not what customers want here either. And our AWS team is determined to deliver choice and options for customers. All of this does mean additional investment in AI infrastructure, he reminded analysts on the post-results conference call: We remain very bullish on the medium to long-term impact of AI in every business we know and can imagine. The progress may not be one straight line for companies. Generative AI especially is quite iterative, and companies have to build muscle around the best way to solve actual customer problems. But we see so much potential to change customer experiences...We are investing a lot across the board in AI, and we'll keep doing so as we like what we're seeing and what we see ahead of us. It was left to CFO Brian Olsavsky to put some meat on the bones of that mission statement: For the first half of the year, CapEx was $30.5 billion. Looking ahead to the rest of 2024, we expect capital investments to be higher in the second half of the year. The majority of the spend will be to support the growing need for AWS infrastructure as we continue to see strong demand in both generative AI and our non-generative AI workloads. But it's not, he insisted, a case of investment taking priority over reducing cost: I don't see it as being binary in any way, nor have I really ever seen it this way in the history of the company. I've been here 27 years. But we don't think of it as we can either be investing or we can be working on trying to take our cost to serve down. We believe we can do both. Jassy summed up the AWS/AI proposition well when he said: I also think that generative AI itself - and AI as a whole - it's going to be really large. I mean it is not something that we originally factored when we were thinking about how large AWS could be and unlike the non-AI space, where you're basically taking all of this infrastructure that's been built on premises over a long period of time and working with customers to help them migrate it to the cloud - which is a lot of work, by the way - in the generative AI space, it's going to get big fast and it's largely all going to be built from the get-go in the cloud, which allows the opportunity for those businesses to continue to grow. But it's going to take time and it's going to take investment. Amazon gets that message. Will Wall Street?

AWS revenue growth soars once again as Amazon CEO calls for more AI

Amazon's cloud division has once again helped the company record revenues as the demand for AI and its associated technologies increases. Revenues for Amazon Web Services (AWS) rose to $26.28 billion in its Q2 2024, surpassing analyst expectations, and generated $9.3 billion in quarterly operating income. The results mean AWS now makes up 18% of its parent company's total revenues, as well as 63% of its total income. The news came as Amazon CEO (and former AWS head) Andy Jassy celebrated the division's success, highlighting its "multi-billion dollar revenue run rate". "The reality right now is that while we're investing a significant amount in the AI space and [on] infrastructure, we would like to have more capacity than we already have today," Jassy said on the earnings call. "We have a lot of demand right now, and I think it's going to be a very, very large business for us." AWS has led the global cloud market for some time, despite close rivals Microsoft Azure and Google Cloud running it close with constant improvements and upgrades. However AWS has also unveiled a host of new updates and expansions recently, including increasing the value of cloud credits available to eligible startups, doubling the amount previously available to help grow and expand their business. It also claims to have successfully passed its goal of training 29 million people with free cloud computing skills a year earlier than its 2025 deadline, with 31 million individuals from 200 countries apparently having benefitted. However the company's success has also led it to face an investigation from the UK Competition and Markets Authority (CMA) over its dominance of the country's cloud market. "We're continuing to make progress on a number of dimensions, but perhaps none more so than the continued reacceleration in AWS growth," Jassy added. "As companies continue to modernize their infrastructure and move to the cloud, while also leveraging new Generative AI opportunities, AWS continues to be customers' top choice as we have much broader functionality, superior security and operational performance, a larger partner ecosystem."