Amazon posts AI-fueled cloud, ecommerce growth, shares jump

(Reuters) -Amazon.com beat fourth-quarter revenue expectations on Thursday as new generative AI features in its cloud and ecommerce businesses spurred robust growth during the critical holiday period.

Investors cheered the results, sending Amazon shares up as much as 8% in trading after the market close.

Amazon’s roster of high-spending business customers have provided it stable growth in an uncertain economy, but its position as the world’s biggest cloud provider is being challenged by rival Microsoft.

AWS CEO Andy Jassy in a statement touted the unit’s “continued long-term focus on customers and feature delivery,” citing efforts to incorporate generative AI into many of its services. The new features “are starting to be reflected in our overall results,” he said.

Later, on a call with analysts, he said generative AI revenue was still relatively small, and that he expected the technology to drive tens of billions of dollars of revenue over the next several years. He said that virtually every consumer business Amazon operated already had or would have generative AI offerings.

In the fourth quarter, Amazon Web Services (AWS) posted revenue of $24.2 billion, largely in line with analysts’ expectations.

To bolster its cloud business and in response to Microsoft’s promised $10 billion investment in ChatGPT parent OpenAI, Amazon is spending up to $4 billion in chatbot-maker Anthropic.

Amazon expects its capital expenses this year to increase to support growth of AWS including additional investments in generative AI and large language models, Chief Financial Officer Brian Olsavsky said on the conference call.

AWS’s operating margin in the fourth quarter surged to nearly 30%, according to Visible Alpha, just shy of gains in the third quarter.

But those were still well short of December-quarter margin in Microsoft’s Intelligent Cloud business – that houses its Azure service – at 48.2%. Google Cloud margin was 9.4%.

Earlier this week, Microsoft and Alphabet reported generous cloud revenue gains in the December quarter, as customers lined up to test new AI features and build their own AI services.

But mounting costs of developing these cutting-edge features irked investors hoping for a big sales boost from the new technology, sending their shares down.

“All eyes will be on AWS, where the mild acceleration of growth … leaves some lingering doubts about whether the cloud unit will be able to hold its own against rivals,” said Insider Intelligence senior analyst Sky Canaves.

LOWER HEADCOUNT

Amazon shares have climbed over 6% this year and 41% in the past 12 months. The stock, which surged 81% in 2023, helped boost the S&P 500 by nearly a quarter last year along with other tech giants.

Despite the strong performance, Amazon began the year by shedding jobs in several divisions. Last year, it cut more than 27,000 jobs after hiring heavily during the pandemic like other tech rivals.

“We’re coming off a period where we’ve done a lot of hiring,” Amazon’s Chief Financial Officer Brian Olsavsky told reporters on a call. “There’s a general feeling in most teams that we’re trying to hold the line on headcount.”

Amazon has built fulfillment centers closer to customers, making it cheaper and faster to deliver packages. During the key Black Friday and Cyber Monday holiday shopping events last year, customers worldwide bought more than 1 billion items on Amazon.

The company has also launched Buy With Prime, a service that enables Prime subscribers to get one- and two-day shipping from merchants who may not be on Amazon.com.

Investors are also expecting a boost in Amazon’s ad revenue in the first-quarter after the company launched ads in Prime Video streaming service. Olsavsky said he expected the Prime Video ads business to be a healthy one but provided no details.

Subscribers can pay an extra $3 per month on Prime to opt out of the ad-tier.

“Amazon’s advertising services segment is gaining momentum, suggesting that the integration of digital ads could significantly enhance marketplace profitability,” said Mayuranki De, Research Analyst at Global X.

Ad revenue rose 27% to $14.65 billion in the fourth quarter, largely in line with estimates.

Amazon’s fourth-quarter sales rose 14% to $170 billion, beating analysts’ average estimate of $166.21 billion according to LSEG data. Adjusted profit of $1 per share beat an average estimate of 80 cents per share.

The company forecast current-quarter revenue of $138 billion to $143.5 billion. Analysts polled by LSEG expect $142.13 billion.

However, not all of Amazon’s efforts are winners. It announced this week that its plan to acquire iRobot, maker of the Roomba vacuum cleaner, for $1.4 billion were dashed by European regulators.

(Reporting by Akash Sriram in Bengaluru and Greg Bensinger in San Francisco; Additional reporting by Arriana McLymore; Editing by Sayantani Ghosh, Richard Chang and Stephen Coates)