Amazon Posts Strongest Cloud Sales Growth in a Year on AI Demand

(Bloomberg) -- Amazon’s cloud unit posted the strongest sales growth in a year, a sign that the retailer’s most profitable unit is recovering from a slump as businesses resume spending on technology projects, including artificial intelligence services. 

Despite the strong cloud performance, the company’s sales forecast for the current quarter fell short of estimates, reflecting concern about the main e-commerce business as consumers continue to spend cautiously.  

Chief Executive Officer Andy Jassy in recent years has cut costs and focused on profitability in Amazon’s online shopping business, laying off thousands of people and touting a more efficient warehouse network. At the same time, he’s backed big investments in artificial intelligence services that Amazon expects to generate tens of billions in revenue in the coming years. Those sales are starting to materialize. 

The Seattle-based company posted first-quarter operating profit of $15.3 billion. Revenue increased 13% to $143.3 billion in the period ended March 31, Amazon said Tuesday in a statement. Both figures topped analysts’ estimates.  

Sales in the Amazon Web Services cloud unit were $25 billion, up 17% from a year earlier. Analysts estimated AWS sales of $24.1 billion. 

“We’re seeing strong demand signals from our customers on the AWS side,” Chief Financial Officer Brian Olsavsky said on a call with reporters. “They’re signing longer deals with larger commitments, many with generative AI components.” Olsavsky said generative artificial intelligence now represented a “multi-billion dollar revenue run rate business” for Amazon, the first time the company has publicly put even an approximate figure on that franchise. 

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That will come at a cost. The AI chatbots, data-crunching tools, and other software that respond to queries from users are possible only thanks to massive quantities of cutting-edge computer chips. Olsavsky said Amazon’s capital expenditures would “meaningfully increase” in 2024, primarily to support AWS growth, including for generative AI. The company has said it will spend more than $150 billion to build out and operate data centers in the coming years. 

Sales growth at the cloud unit had slowed to a record low last year as businesses cut back on technology spending and sought to curb computing bills that ballooned during the pandemic. Investors have been banking on a rebound this year, particularly after strong results last week from Microsoft Corporation and Alphabet Inc.’s Google, Amazon’s two main rivals in the business of renting computing power and data storage.

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AWS generated a profit of $9.42 billion in the quarter. The unit’s operating margin — 37.6% — is the widest since Amazon began disclosing sales for its cloud business. The division held its largest-ever layoffs last year, and has continued to trim its ranks selectively, even as it hires in other areas.

Amazon said revenue will be $144 billion to $149 billion in the period ending in June. Analysts, on average, projected $150.2 billion.

The company’s main e-commerce business reported sales of $54.6 billion in the quarter, slightly missing analysts’ estimates. Olsavsky said consumers continue to trade down to save money. Shoppers are ordering more consumables, which they need quickly, but also cost less than other categories, he said. That puts pressure on the profitability of the business because Amazon has to process and deliver more units.

The slowing e-commerce sales also have pushed Amazon to seek greater growth for other business lines. For example, advertising revenue rose 24% to $11.8 billion. The results reflect the first quarter since Amazon introduced video advertising to the Prime Video streaming service.  

Amazon shares gained about 2.5% in premarket trading on Wednesday after closing at $175 in New York. The stock has jumped about 15% in 2024.