Amazon predicts cloud growth will gain steam as earnings bounce back

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Amazon’s bumper holiday season and forecasts for accelerating cloud growth boosted its shares as earnings rebounded from last year.

Sales at Amazon’s closely watched cloud computing division AWS, a critical profit driver for the business, rose 13 per cent to $24.2bn in the three months to December, a slight increase from 12 per cent growth last quarter.

A prolonged slowdown in cloud growth came as customers began looking for ways to cut costs, although the big cloud computing providers — Amazon, Microsoft and Google — are eyeing demand for generative AI as a way to kick-start sales. Despite the increase, AWS sales growth remains far below the 40 per cent reported at the end of 2021.

The acceleration in AWS sales growth will “continue into 2024” as the pace of customer cost-cutting slows, said Amazon chief financial officer Brian Olsavsky. He said the company was seeing “significant interest” in its generative AI services, but he declined to disclose what impact that has had on cloud growth. 

Amazon shares, which are up about 50 per cent in the past 12 months, rose as much as 9 per cent after the earnings report on Thursday.

The Seattle-based company reported a rebound in pre-tax earnings, which climbed to $13.2bn compared with $2.7bn in the same period in 2022, well ahead of analysts’ expectations for $10.4bn. Overall, Amazon’s revenue rose 14 per cent to $170bn, ahead of analysts’ forecasts for $166.3bn.

Looking ahead to the first quarter of 2024, Amazon said it expected revenues of between $138bn-$143.5bn and pre-tax earnings of between $8bn-$12bn, broadly in line with analysts’ forecasts.

Amazon’s North American business, which includes its online store, swung back to an operating profit from losses a year ago. The segment’s improving margins have been helped by efforts to cut costs, a reorganisation of its vast US logistics network and resilient consumer spending during the busy holiday season.

“This Q4 was a record-breaking holiday shopping season and closed out a robust 2023 for Amazon,” said chief executive Andy Jassy.

The company has sought to maximise the logistics network it built out during the pandemic — for example by rolling out its Buy with Prime service that allows merchants selling on other platforms to utilise its delivery service.

Amazon has also been expanding its high-margin advertising business, including by introducing ads to its Prime Video streaming service. Advertising revenue growth accelerated to 26 per cent during the final quarter of 2023, stripping out the impact of currency moves.

Analysts have been looking for signs in Big Tech earnings this week that huge investments into generative artificial intelligence will translate into higher sales and profits, and whether the technology will accelerate cloud growth at rivals Microsoft and Google.

One crucial area of focus is how Amazon compares with early mover Microsoft, which has captured much of the excitement around the technology. “Amazon remains an obvious number two in generative AI,” Deutsche Bank analysts said in January.

Amazon rolled out Amazon Q, a rival to Microsoft’s generative AI assistant, last year alongside a suite of AI services and hardware, and on Thursday unveiled an AI shopping assistant that will answer customer questions and make recommendations. However, the company has not disclosed customer numbers.

Microsoft, the number two cloud-computing provider, this week said demand for AI services had boosted its Azure cloud platform revenues in the latest quarter more so than it had done during the prior three months. But forecasts for continued AI-driven cloud growth had failed to impress Wall Street.

Despite a spate of recent lay-offs that followed deeper cuts last year, Olsavsky said most Amazon teams were “looking to hold the line on headcount”. 

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