Amazon Misses Targets Amidst AI Investment Woes

Amazon reported a significant miss on both revenue and earnings for the recent quarter, causing shares to decline in after-hours trading. Total revenue reached $201.9 billion, narrowly missing the consensus estimate of $202.3 billion. Earnings per share also fell short, coming in at $1.89 against an expected $1.96. However, the cloud computing arm, Amazon Web Services (AWS), demonstrated robust performance. AWS revenue surged by 39.3% year over year, marking its fastest growth rate in almost five years. This acceleration was driven by services like Amazon Bedrock, which supports generative AI applications. AWS operating income also surpassed expectations. Despite the strong AWS performance, the core retail and advertising businesses underperformed. Online stores and advertising revenue missed estimates, impacting overall results. Amazon attributed the advertising slowdown to timing anomalies, including the shift of Prime Day and changes in search engine marketing programs. Investor sentiment is being shaped by concerns over the massive investments in AI infrastructure and how these will be funded, especially as Amazon's free cash flow has turned negative. Management's guidance for the upcoming quarter was also slightly below analyst expectations, though forecasts are often conservative. Amazon is projecting substantial long-term growth for AWS, with expectations of it becoming a $1 trillion revenue business in the next five to 10 years. The company also plans to start selling its in-house chips directly to customers outside of AWS by late 2027. Capital expenditures were significant, totaling approximately $77 billion in the quarter. Amazon reiterated its expectation of $220 billion in capex for the full year, with plans for further substantial spending next year aimed at achieving attractive financial returns.