Key Points
- Amazon’s Q2 capital spending on AI infrastructure is expected to rise by 43%.
- AWS faces tough competition from Microsoft’s AI-powered Azure services.
- Amazon partners with Anthropic and offers startups free AI model credits.
- Amazon shares are up 23% this year but recently fell over 6%.
Amazon.com (AMZN.O) is anticipated to join Google and Microsoft on Thursday in reporting a significant surge in capital spending on artificial intelligence. As Big Tech races to leverage booming AI technology, Amazon’s capital investments—primarily aimed at building cloud and generative AI infrastructure—are expected to have risen by 43% in the second quarter, reaching $16.41 billion, according to LSEG data. It marks a roughly $1.5 billion increase from the previous three months.
However, this steep spending surge is expected to exert pressure on Amazon’s margins, potentially offsetting benefits from cost cuts and supply chain efficiencies that have been enhancing the profitability of its retail unit. Despite these investments, Amazon’s Amazon Web Services (AWS) business, which has long been a leader in the cloud-computing market, has faced increasing competition from Microsoft’s AI-powered Azure cloud services in recent quarters.
In response, Amazon has partnered with companies like Anthropic and offered startups free credits to cover the cost of using major AI models, aiming to boost the market share of its AI platform, Bedrock. Additionally, Amazon appointed a new head for the AWS unit in May to spearhead these efforts.
Earlier this month, Microsoft and Google-parent Alphabet (GOOGL.O) also announced continued investments in AI, even as the payoff from these investments is taking longer than some investors had hoped. This announcement led to a decline in Big Tech stocks, which had surged earlier this year on the promise of AI advancements.
“Amazon’s capital expenditure will certainly be scrutinized closely. It has been slow in the adoption of AI and is skewed towards smaller companies that have struggled in the high interest-rate environment,” commented Ben Barringer, an analyst at Quilter Cheviot. “We would expect AWS to start speeding things up in its AI development going forward.”
Amazon shares have increased by about 23% this year, although the stock has fallen more than 6% since July 8, when it hit a record high. It is part of a broader market selloff led by U.S. megacaps.
According to LSEG data, AWS’s growth is likely to have remained similar to the previous quarter, just over 17%. However, Morgan Stanley analysts noted that “AWS needs to grow 18%+ to assure investors of AWS’s AI positioning and its ability to generate high-teens growth through this heavy capex investment period.”
Due to 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 a broader slowdown in consumer spending and competition from fast-growing Chinese players like Temu and TikTok Shop, which are attracting more U.S. shoppers. Amazon’s total revenue is expected to have grown by 10.6% to $148.56 billion, marking the slowest rise in five quarters.
