How Amazon’s Q3 (and Q4) Sets Up Crucial AI Race
At any other time, Amazon’s third-quarter performance would have made investors giddy. The company beat expectations across multiple metrics, including revenue and earnings, thanks in part to a surging ad business. But its cloud group’s relatively lackluster performance muted Wall Street’s reaction. At least for now.
Amazon appears to have reached a pivotal moment, with implications that may be deep for retailers and brands. Understanding that begins with the numbers:
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The e-tailer’s revenue of $143.1 billion easily beat expectations of $141.4 billion for 13 percent year-over-year growth. Meanwhile, net income soared. In the year-ago quarter, earnings landed at 28 cents a share, or $2.9 billion. Analysts anticipated 58 cents this time, but Amazon instead handed in 94 cents, or $9.9 billion.
A noteworthy chunk of those results came from the company’s advertising arm. A juggernaut in its own right, the ads business, which was expected to pull in $11.6 billion in revenue, reported $12.06 billion, an increase of 26 percent over this time last year. Amazon still trails Google and Meta in the online advertising arena by a sizable margin, but the platform isn’t as vulnerable to changes like Apple’s iOS privacy update — in fact, it appears to have benefitted from that, as brands rejiggered their ad budgets. In any event, Amazon advertising is obviously growing and rather quickly.
One would think the good news would continue with its cloud group, Amazon Web Services, given the voracious demand for AI and machine learning systems, tools and services, especially in retail. Yet AWS revenue of $23.06 billion didn’t quite meet the $23.20 billion analysts forecasted.
The scenario might be a bit embarrassing for chief executive officer Andy Jassy, who used to run AWS before he ascended into Jeff Bezos’ old role. But naturally he focused on the positives — including improvements in the e-commerce end of the business — and chalked up the matter to instability in AWS growth that is still righting itself.
“We had a strong third quarter as our cost to serve and speed of delivery in our Stores business took another step forward, our AWS growth continued to stabilize, our advertising revenue grew robustly, and overall operating income and free cash flow rose significantly,” the CEO said in prepared remarks.
In a call with media and analysts, Amazon chief financial officer Brian Olsavsky also pushed back against the notion that AWS growth has plateaued. It’s just in a “delicate” position.
“There are a number of cross streams right now,” he said. “We have cost optimization work that is starting to slow down at least,” while new workloads from clients fill its cloud pipeline. It’s also worth noting that Amazon made a large investment in AI startup Anthropic during the third quarter, which should help.
Whether investors weighed that or not isn’t clear, but Amazon largely escaped their ire — unlike Google, which also beat expectations earlier this week, but still saw disappointed investors push down its shares over Google Cloud’s outlook. Amazon stock initially rose on the results, but then settled back into a somewhat flat posture.
Even so, executives may be breathing a sigh of relief. Several companies across tech and retail suffered a string of tough quarters following the pandemic. Trimming budgets became the new black across these sectors, and Jassy & Co. was no exception, as Amazon staged a comeback that hinged on cutting costs, staffers and distribution centers. The trick with this type of strategy is doing that without harming the core business or undermining customer experience.
Apparently this effort has been working. Growth in Amazon retail sales is ticking back up. In the third quarter, which included its big Prime Day sale in July, Amazon clocked sales up 7 percent over last year.
As for the next quarter, analysts pegged revenue coming in at $166.6 billion, which lines up with Amazon’s forecasted $160 billion to $167 billion range, though on the higher end. If the figures pan out, the fourth quarter of 2023 would show a notable increase over last year’s $149.2 billion revenue, even saddled with AWS’s ongoing struggle.
It’s easy to see how that would work. The last three months of 2022 broke the streak of down quarters by showing some growth, but it still marked Amazon’s worst annual loss in recent memory and its least profitable fourth quarter of all time. Of course, there were — and continue to be — broader macroeconomic, and geopolitical issues and other major factors like inflation at play. But Q4 is still the peak shopping period of the year and this time, it will include the second Prime Day event in October, in addition to Black Friday and holiday sales.
This matters because, taken together, it appears that Amazon’s retail and ads businesses are balancing out AWS’ challenges. But the season won’t last forever, and with AI fever clearly sweeping Wall Street, the company will need to stabilize its cloud division and take greater swings.
AWS remains the top cloud provider with control of 32 percent of the global market at the end of 2022, according to Statista. Microsoft Azure landed in second place with 23 percent, and Google Cloud’s 10 percent put it in third. But both rivals have made gains this year, and they are both hyper-focused on AI. (Although in Google’s case, perhaps not as much as investors hoped.) Meanwhile, a bevy of small or newer platforms are flooding in, hoping to court brands with their bots, algorithms and large language models boasting generative AI, predictive modeling, recommendations and much more.
Amazon, which has been touting its data science chops for years, is surely gearing up for a tremendous fight — and retail, a key target for cloud providers, may want to brace itself. Because the holiday season’s flurry of activity will probably pale in comparison to what comes after.
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