Key Points
- Amazon’s AWS has signed a $38 billion cloud deal with OpenAI.
- The deal is a major win for AWS, which had been losing market share to Microsoft and Google in the AI space.
- Amazon’s stock rose 5% to a record high following the announcement.
- The agreement helps justify Amazon’s massive AI spending, expected to be around $125 billion this year.
Amazon’s cloud business just got a major boost after signing a $38 billion deal with OpenAI. This agreement is a huge endorsement for the e-commerce giant’s cloud division, which has faced recent setbacks, including losing market share to rivals and a major outage that disrupted the internet.
For years, Amazon Web Services (AWS) dominated the cloud industry. But recently, Amazon has watched rivals like Microsoft and Google snatch up big contracts with their AI-focused cloud services. As a result, Amazon’s lead in the cloud market slipped from 34% just before ChatGPT’s 2022 launch to 29% as of September. Many investors saw Amazon as a laggard in the AI race because it was late to release its own flagship AI model and didn’t have a consumer chatbot like OpenAI’s ChatGPT.
Lately, however, Amazon has been spending heavily to catch up. Last month, it opened an $11 billion AI data center in Indiana, where the startup Anthropic is training its AI models using Amazon’s own custom chips.
Analysts and investors say Monday’s deal with OpenAI, a top-tier customer, combined with strong quarterly results, shows that AWS is regaining momentum. “While it is small relative to other deals OpenAI has made with other cloud providers, it represents a key first step in Amazon’s effort to partner with a company that is spending over a trillion dollars on computing power in the coming years,” said Mamta Valechha, an analyst at Quilter Cheviot.
Amazon’s stock jumped 5% to a record high after the deal was announced. This contrasts with its performance for most of the year, where it lagged behind other Big Tech stocks that have soared on huge cloud-computing deals with AI startups. For comparison, Microsoft recently disclosed a $250 billion commitment from OpenAI for its Azure cloud services, and Oracle has signed a $300 billion deal with the startup.
This deal helps justify Amazon’s huge spending on AI. The company is expected to spend around $125 billion on capital expenditures this year and even more next year. Analysts believe the OpenAI deal offers a clear path for Amazon to make back that spending. One analyst estimated it could boost AWS’s backlog by about 20% in the fourth quarter.
“It clearly seems like they (Amazon) are finally in the flow of what is happening with these large language models versus before,” said William Lee, an investor at SuRo Capital, which holds a stake in OpenAI.
