LDN - Business

Amazon set to join Big Tech's spending surge as AI race heats up

[August 01, 2024] By Deborah Mary Sophia

(Reuters) -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% 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.

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Figurines with computers and smartphones are seen in front of Amazon logo in this illustration taken, February 19, 2024. REUTERS/Dado Ruvic/Illustration/File Photo

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

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

Growth at AWS is likely to have stayed similar to the previous quarter at just over 17%, according to LSEG data. But, Morgan Stanley analysts said: "AWS needs to grow 18%+ 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% in the April-June quarter, compared with 2.6% in the previous quarter and an average of 2.7% over the past two years.

Growth in its North American retail business likely slowed to 8% between April and June, from 12.3% 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 U.S. shoppers.

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

(Reporting by Deborah Sophia in Bengaluru; Editing by Sayantani Ghosh and Devika Syamnath)

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