Amazon set to join Google, Microsoft's spending surge as AI race heats up

Amazon.com is expected to join Google and Microsoft on Thursday in reporting a surge in capital spending on artificial intelligence as Big Tech companies rush to capitalize on the booming technology.
 

The e-commerce giant's capital investments - mostly for building cloud and generative AI infrastructure - is expected to have risen 43 per cent in the second quarter to $16.41 billion, according to LSEG data. That represents a roughly $1.5 billion increase from the previous three months.
 

The steep spending is also expected to pressure Amazon's margins, outweighing benefits from cost cuts and supply chain efficiencies that are aiding the retail unit's profitability.
 

 

The company's Amazon Web Services (AWS) business has long dominated the cloud-computing market but it has been facing tough competition from Microsoft in recent quarters after the Windows maker rolled out AI-powered services to its Azure cloud business.
 

In response, Amazon has partnered with the likes of Anthropic and offered startups free credits that cover the cost of using major AI models to boost the market share of its AI platform Bedrock. It also named a new head for the AWS unit in May.
 

Microsoft and Google-parent Alphabet also said earlier this month they would plow ahead with investments even as the payoff from AI takes longer than some investors had hoped. This knocked Big Tech stocks whose valuations have soared this year on the promise of AI.
 

"Amazon's capex spend will certainly be scrutinized closely.
 

It has been slow on the adoption of AI and is skewed towards smaller companies which have struggled in the high interest-rate environment," said Ben Barringer, analyst at Quilter Cheviot.
 

"We would expect AWS to start speeding things up in its AI development going forward."
 

Amazon shares have risen about 23 per cent this year. The stock has shed more than 6 per cent since July 8, when it hit a record, part of a broader market selloff led by US megacaps.
 

Growth at AWS is likely to have stayed similar to the previous quarter at just over 17 per cent, according to LSEG data. But, Morgan Stanley analysts said: "AWS needs to grow 18 per cent+ in order to ... ensure investors of AWS's (AI) positioning and its ability to generate high-teens growth through this heavy capex investment period."
 

As a result of the spending increase, Amazon's gross profit margin growth is expected to have slowed to 1.3 per cent in the April-June quarter, compared with 2.6 per cent in the previous quarter and an average of 2.7 per cent over the past two years.
 

Growth in its North American retail business likely slowed to 8 per cent between April and June, from 12.3 per cent in the January-March quarter, amid signs of a wider slowdown in consumer spending and some competition from new and fast-growing Chinese players such as Temu and Tiktok Shop that are enticing more US shoppers.
 

Amazon's total revenue is expected to have grown 10.6 per cent to $148.56 billion - the slowest rise in five quarters.


(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)