Amazon falls after warning of slowdown in cloud computing business growth

By Matt Day

Amazon.com Inc. fell after warning that growth in its cloud computing business is cooling, dashing hopes that the company’s most profitable division would weather an otherwise lackluster environment for technology spending.
 

On a conference call Thursday, after reporting first-quarter profit and revenue that topped Wall Street estimates, executives jolted investors with the disclosure that sales growth at Amazon Web Services had slowed further in April. AWS revenue rose 16% to $21.4 billion in the first quarter, the weakest growth rate since Amazon began breaking out the unit’s sales. 

Amazon shares were down 2.2% at 9:33 a.m. in New York on Friday. Some analysts have speculated that AWS growth could sink to single digits, a dramatic slowdown for a business that entered 2022 with quarterly sales gaining almost 40% year over year. 

AWS is the largest seller of rented computing power and software services, a market it contests with rivals including Microsoft Corp. and Alphabet Inc.’s Google. The unit has been the main source of Amazon’s operating income for years, helping bankroll the company’s big bets in new areas even when Amazon struggled to turn a profit in its main online retail franchise. AWS is less profitable now than it was a year ago, which is partly the result of discounts offered in exchange for longer-term contracts as customers are cautious about their expenses, Chief Financial Officer Brian Olsavsky said on a call with reporters.

Analysts, as they had with Amazon’s rivals, pressed executives about the company’s efforts in artificial intelligence, particularly for the cloud unit. Chief Executive Officer Andy Jassy said Amazon has 25 years of experience investing in machine learning.

“It’s deeply ingrained in everything we do,” he said, adding he’s confident AWS will benefit from large-language models and generative AI by providing tools that help companies customize the technology for their own needs. He also said Amazon is developing computer chips that will handle the capacity needed to help train large-language models that are the basis of popular chatbots such as OpenAI’s ChatGPT.

Growth also has slowed dramatically in Amazon’s core e-commerce business since a pandemic-era boom petered out. Sales in Amazon’s online stores category — the company’s original business — were flat compared with a year ago, and down about 4% from the same period in 2021. 

To cope with that reality, Amazon has been relying on the more profitable business of selling services and advertising to independent merchants who rent space on Amazon’s website and in its warehouses. The first-quarter earnings reflect that shift. Advertising sales rose more than 21% to $9.51 billion and seller services jumped 18% to $29.8 billion in the quarter.

Total revenue increased 9.4% to $127.4 billion in the quarter, the company said in a statement, above expectations for $124.7 billion. Operating income was $4.8 billion. Analysts, on average, projected $3 billion.

Those positive numbers followed similar results this week from fellow big tech companies Alphabet, Microsoft and Meta Platforms Inc. Microsoft reported sustained sales for its public cloud business while Alphabet’s Google Cloud produced a profit for the first time. Meta’s digital advertising business rebounded, returning the company to sales growth after three straight quarters of declines. 

Amid slowing growth, Amazon has made a concerted push to cut costs and, here too, the results suggest those efforts are starting to pay off. Operating expenses increased 8.7% in the quarter, the slowest pace in at least a decade. The company’s North America segment was profitable on an operating basis for the first time since late 2021.

The Seattle-based company has been working for more than a year to streamline its businesses and is eliminating 27,000 jobs, the largest such cull in its history. The latest round of layoffs announced Wednesday landing mostly on employees of AWS, its cloud unit. Amazon employed almost 1.47 million people as of March 31, a decrease of 10% from the period a year earlier and down from more than 1.54 million workers three months earlier. 

Even with the cloud slowdown, Amazon projected sales of $127 billion to $133 billion in the current period ending in June and operating profit of $2 billion to $5.5 billion. Both were in line with estimates.