Amazon’s stock inches up as cost-cutting measures and AI investment boost AWS profits

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

Amazon reported first-quarter earnings before certain costs such as stock compensation of 98 cents per share, handily beating Wall Street’s forecast of 83 cents per share, while revenue rose 13% from a year earlier, to $143.3 billion, ahead of the $142.5 billion expected.

Meanwhile, the company’s operating income jumped by more than 200%, to $15.3 billion, far outpacing its revenue growth, in a sign that its focus on cost-cutting and other efficiency measures is paying off. Net income also more than tripled from a year ago, rising to $10.4 billion.

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

Amazon’s increased profitability stems partly from the solid performance of its cloud computing unit, Amazon Web Services Inc. Revenue there rose by 17% from a year earlier, to $25 billion, beating the Street’s forecast of $24.5 billion in sales. Although AWS’ growth has slowed over the last year as enterprises reduced their cloud computing budgets, it has continued to outperform expectations.

Now, Amazon says, it’s seeing those cost optimizations taper off, thanks in part to the growing interest in generative artificial intelligence, which is becoming a key element of the company’s cloud offerings.

AWS has also become more profitable, with its high margins helping to drive $9.42 billion in operating income, 62% of the company’s total. Moreover, AWS’ operating margin widened to 37.6%, its highest rate since 2014.

The growth means that AWS has hit an important milestone, becoming a $100 billion annual business for Amazon, said the independent technology analyst and go-to-market strategist Sarbjeet Johal.

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

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

Amazon also reported strong growth in its advertising business, with revenue there rising 24%, to $11.8 billion, just ahead of the $11.7 billion analyst forecast. The company recently introduced ads on its Amazon Prime Video streaming service, which many analysts believe could drive significant revenue growth over time.

The ad business has become an increasingly important one for Amazon, with growth now outpacing AWS. That’s in line with a wider industry trend, with the likes of Google parent Alphabet Inc., Meta Platforms Inc. and Snap Inc. all showing better-than-expected advertising revenue growth rates last week.

Amazon’s bottom line has improved as a result of the widespread cost-cutting measures introduced by Jassy over the last year. The company has become more disciplined in terms of spending, while doubling down on its most profitable businesses. That’s evidenced by Amazon’s operating margin, which reached double digits for the first time in the company’s history, rising to 10.7% in the quarter, up from 7.8% three months earlier.

“Advertising is growing and AWS has been strong,” Amazon Chief Financial Officer Brian Olsavsky said on the earnings call. “A lot of that’s driven by cost controls and expanding revenue on the top line and lower cost structures throughout the company.”

The cost-cutting measures include thousands of layoffs, with more than 27,000 employees losing their jobs since late 2022. Those cuts have continued through this year as hundreds of workers in Amazon’s health and cloud business lost their jobs recently. In addition, Amazon’s technology and infrastructure costs have declined slightly from a year earlier, while sales and marketing costs fell 5%, and general and administrative expenses were reduced by 10%.

Amazon’s generative AI investments are the main exception to this trend, and Olsavsky said on the call that the company will continue to pour more money into this part of its business. In particular, it will continue to build out its computing infrastructure for generative AI, and that will likely result in a “meaningful increase” in capital expenditures this year, he added. That’s also in line with the broader industry trend, as Amazon’s rivals Microsoft and Google are also accelerating their investments in generative AI infrastructure.

“Amazon has sharpened its focus on execution and fat cutting,” Johal said. “It is working hard to streamline and convey AI messaging to the customers, partners and the market, and more work is needed in this area.”

Holger Mueller of Constellation Research Inc. said Amazon has set an example for others to follow with its refined cost structure. “Of course, the star of the show was AWS, which has finally hit the $100 billion runway, an industry first for cloud infrastructure providers,” the analyst said. “With new regions in Mexico, the Middle East and in Mississippi in the U.S. all coming online, it’s clear that AWS is not slowing down any time soon. The unit now accounts for two thirds of Amazon’s overall profit, and investors will be looking for further improvements in the next quarter.”

One disappointment for investors may be that Amazon once again declined to implement a quarterly dividend, even though its cash and equivalents rose to $73.9 billion at the end of the quarter, up from $54.3 billion. Last week, Alphabet Inc. announced it will start paying investors a dividend of 20 cents per share, which came after Meta said in February it will pay 50 cents per share. Amazon is now the only trillion-dollar market cap internet company that does not pay shareholders a regular dividend.

Photo: Robert Hof/SiliconANGLE