Why Amazon's massive retail business is no longer enough

Mint

3 days ago

Amazon's retail business is raining profits these days. But that alone won't cut it in the age of artificial intelligence.
The company's generally strong second-quarter report late Thursday was marred by what was considered a disappointing showing by its Amazon Web Services cloud-computing business. AWS revenue grew 17% from a year earlier to about $30.9 billion, which was largely flat with the growth rate shown the previous quarter and merely in line with Wall Street's projections. That came after rivals Microsoft and Alphabet's Google reported accelerating growth in their own cloud units for the same period.
When pressed about AWS growth on the company's earnings call, Amazon Chief Executive Andy Jassy noted that 'we have a meaningfully larger business in the AWS segment than others." He is right—to an extent. Microsoft said Wednesday that its Azure cloud-computing arm just surpassed $75 billion in annual revenue, which is about 36% below the $116 billion AWS is currently generating.
But Azure doesn't include all of Microsoft's cloud offerings, or even all of its efforts in generative AI services such as Copilot. Microsoft said Wednesday that revenue for its total Microsoft Cloud business increased 27% year over year to $46.7 billion for the June quarter. And that was a sharp acceleration of 7 percentage points from the growth reported for the March quarter. Microsoft's shares rose nearly 4% Thursday after its report. Amazon's stock was down more than 6% in after-hours trading after its results.
The irony is that the relative weakness in Amazon's cloud business comes as the company's retail side is humming. The online stores division—which reflects the products Amazon sells itself over its website—saw sales jump 11% year over year to $61.5 billion. That is the best growth rate for that unit since early 2021 when Amazon was still benefiting from a Covid-19-induced online shopping spree. North American operating income that reflects the bulk of Amazon's retail business hit $7.5 billion—34% ahead of Wall Street's projections. And that comes in a quarter clouded by questions about tariffs and the health of consumer spending.
Still, given what Amazon, Microsoft and Google are spending to build up generative AI capabilities, trends in their respective cloud-computing arms are watched closely for signs of a return on that investment. And those amounts are getting even more staggering. Amazon said Thursday its cash capital expenditures of $31.4 billion in the second quarter are 'reasonably representative" of what it will spend in the next two periods, which would bring the year's total to about $118 billion.
That is nearly double what Amazon averaged over the previous five years, which included a massive step up in investments in the company's order-fulfillment network. And that isn't cheap even for a company that now sells $670 billion of goods and services annually. Amazon's free cash flow is expected to slip 6% this year despite a projected 9% increase in sales, according to consensus estimates from Visible Alpha.
Amazon's big-spending, Big Tech rivals are in the same boat. But Microsoft, Google and Meta Platforms gave investors plenty of good news in their latest reports that softened the blow of those big bills. If Amazon is going to sell its AI vision, it will need AWS to pack a bigger punch.
Write to Dan Gallagher at [e-mail]