Amazon further fuels the AI ​​race

The sector's sales leader announced strong first-quarter results on Tuesday afternoon. Sales growth exceeded Wall Street targets in nearly all of the company's divisions, and operating profit more than tripled from a year earlier to $15.3 billion, beating analyst expectations by 36%. This pushed Amazon's operating margin above 10% for the first time in the company's history, according to data from S&P Global Market Intelligence.

Investors were unfazed by Amazon's second-quarter sales and profit growth that fell slightly below Wall Street expectations. This has become the norm for a company known for issuing conservative forecasts. Amazon's operating profit forecasts have missed analyst consensus estimates in nine of the past 12 quarters, according to FactSet data. More interesting is the forecast for capital spending, with Amazon announcing Tuesday that capital spending and equipment finance leases will increase “significantly” this year from nearly $49 billion last year.

The message was similar to those announced by Microsoft, Google, and Metaplatform last week. These drew mixed reactions from investors. Meta's plan to increase capital spending by 12% this year caused parent company Facebook's stock to plummet the next day, while Microsoft and Google's parent company Alphabet saw their stock prices rise on the news. Amazon shares, which have risen by two-thirds in the past 12 months, rose slightly in after-hours trading.

Part of the credit for that should go to Andy Jassy. Amazon's CEO spent part of Tuesday's conference call detailing how the company is seeing strong demand for generative AI workloads in its AWS cloud business. “We don't use capital unless we have a clear signal that it can be monetized in this way,” he said, adding that there is room for improvement in the cost structure of a retail business where profit margins are stretched thin. He added that there are still many. It hit a new high this quarter.

This strongly suggests that Amazon may be past the days of its infamous “investment mode” of increasing profits. Credit goes to a growing mix of high-margin businesses, including cloud computing, advertising and subscription-based services. Advertising revenue soared in 2024. In the most recent quarter, it reached $11.8 billion, up % year over year. That's if the company's Prime Video streaming service currently has a light ad load.

AWS revenue rose 17% year over year, up 4 percentage points from the December quarter, and was the sector's highest growth rate in more than a year. The cloud division delivered a record operating profit of $9.4 billion, 25% above Wall Street expectations. AWS alone now has annual revenue approaching his $100 billion, making it his largest enterprise software business after Microsoft.

At Everything Store, everything needs to be done right to cover the growing bill of AI.

Email Dan Gallagher at dan.gallagher@wsj.com.