Amazon's shares slide after AI spending plans disappoints investors

Amazon.com Inc., risking Wall Street’s displeasure, told investors that profits for now will take a back seat to heavy spending on artificial intelligence. The shares fell. 
 

The company projected operating income for the current quarter ending in September will be $11.5 billion to $15 billion. Analysts, on average, were looking for $15.7 billion.

After focusing on cost-cutting during the past two years, Chief Executive Officer Andy Jassy is spending in an effort to capitalize on the boom in generative AI, which can create text, video and images based on simple user prompts. Amazon has said the opportunity represents a “multibillion-dollar revenue run rate business.”

 

The shares fell 10% to $165.35 as the markets opened on Friday, the stock’s biggest intraday decline since October 2022. The fall erased $197 billion in market value. The stock had gained 21% this year through Thursday’s close.

The decision to spend in the short term to take advantage of long-term growth opportunities has been embedded in Amazon’s DNA since Jeff Bezos started the company 30 years ago.

“Amazon has always had spurts of investment at the expense of short-term margins, and it appears they are planning a spurt into the rest of the year,” said Gil Luria, an analyst at DA Davidson. 

“The good news,” Luria said, is much of the money is going toward the Amazon Web Services cloud unit that produced 19% sales growth in the second quarter — more than analysts’ projected.

During a briefing with reporters after the company announced second-quarter results on Thursday, Chief Financial Officer Brian Olsavsky said Amazon spent $30.5 billion on capital expenditures in the first half of the year. That includes money for data centers required to power AWS. Then he pledged to spend even more in the second half. 

“We see strong demand in generative AI and nongenerative AI workloads,” Olsavsky said. 

In recent weeks, investors have signaled growing impatience with tech companies’ efforts to profit from their massive investments in AI. 

Microsoft Corp. on Tuesday posted slowing growth in its Azure cloud-computing arm and said it expected to keep spending heavily on data centers. The next day Meta Platforms Inc. reported upbeat earnings that were expected to buy it time for its AI investments to pay off. Last week, Alphabet Inc. shares sank after it surprised Wall Street with sharply higher costs that overshadowed better-than-expected quarterly sales.

Amazon also provided conservative revenue guidance for the third quarter. Sales will grow between 8% and 11% to as much as $158.5 billion, the company said in a statement. Analysts estimated $158.4 billion on average.

Referring to the revenue outlook, Olsavsky said the company is “seeing cautious consumers looking for deals.” Big news events, including the Olympics, appear to have interrupted normal purchasing patterns in the current quarter, making it more difficult to forecast sales, he added.

The cloud business, which suffered record low sales growth last year, continued to stage a comeback during the second quarter. AWS revenue jumped 19% to $26.3 billion, beating estimates, and posting the second consecutive period of quarter-over-quarter growth.

Total revenue increased 10% to $148 billion in the period ended June 30, compared with analysts’ average estimate of $148.8 billion. Seattle-based Amazon posted an operating profit of $14.7 billion. Analysts, on average, projected about $13.6 billion, according to data compiled by Bloomberg.

Amazon’s operating expenses rose 5.2% to $133.3 billion, less than Wall Street projections. The company’s workforce increased 5% to more than 1.53 million people. 

The strong cloud computing performance was offset by weakness in Amazon’s main e-commerce business. Revenue from Amazon’s seller services and advertising both fell short of estimates.

Sky Canaves, an EMarketer Inc. analyst, cited “softer consumer spending” at the online business during the quarter, which fell between major sales events in March and July.

“Amazon will have to position its offerings and promotions to take advantage of these trends, such as with the reported plans to launch a Temu-like discount section in time for the holidays this year,” she said.