AI

Amazon Keeps Profit Margins in Orbit

E-commerce giant’s strong operating earnings offset huge jump in AI spending and counter worries of margin decline

By Dan GallagherFollow

Nov. 1, 2024 at 6:00 am ET

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Amazon CEO Andy Jassy says he expects next year’s capital spending to surpass this year’s planned $75 billion. PHOTO: DAVID RYDER/BLOOMBERG NEWS

Like its big tech rivals, Amazon.com AMZN 6.56%increase; green up pointing triangle is spending a king’s ransom on artificial intelligence. Unlike them, it also has plenty of customers dropping money on toothpaste and razorblades. 

That strange brew proved a potent mix for the company’s third-quarter reportThursday. Amazon reported an eye-popping $22.6 billion in capital expenditures for the quarter—a new high and an 81% jump year-over-year that exceeded even the substantial capex increases posted by Microsoft, Meta Platforms and Google’s parent, Alphabet, for the same period. Analysts had been expecting Amazon’s spending to rise 42% to about $17.6 billion for the third quarter, according to data from FactSet.

Investors haven’t been taking such surprises well of late; Meta and Microsoft saw their share prices slide around 4% and 6%, respectively, on Thursday following their reports for the quarter. But Amazon had some good news in store too: Total revenue grew 11% from a year earlier, beating Wall Street’s targets and marking an acceleration from the 10% pace shown in the June quarter. Amazon credited demand for “everyday essentials” products for helping lift sales. And the company’s operating profit came in at $17.4 billion, nearly 19% above analysts’ projections. Amazon’s share price jumped more than 5% in after-hours trading Thursday.   

Amazon projected an operating income range of $16 billion to $20 billion for the fourth quarter, the midpoint of which exceeded analysts’ estimates by 4%. That alone is unusual; Amazon’s earnings forecast has missed the Street’s consensus estimate in 13 of the company’s past 16 quarterly reports, according to FactSet data. Margin CallAmazon’s operating margin per yearSource: the companyNote: 2024 reflects reported figures for first three quarters and company’s Q4 projection.2015’16’17’18’19’20’21’22’23’2401234567891011%

The projection countered growing worries that the cost of some of the company’s latest initiatives, which include a satellite-based internet service, would weigh on margins. “Margins trump top line tonight,” Brent Thill of Jefferies said in a note. “Simply put, 3Q results suggest Amazon can invest in growth while delivering greater profitability,” Ronald Josey of Citigroup said in his own report. 

Amazon’s bottom line is of particular import to investors given that the bulk of its now-$620 billion in annual revenue still comes from the notoriously low-margin retail business. But the company has been successfully beefing that up over the past few years thanks to its lucrative cloud computing business and newer ventures such as advertising, which now generates more than $53 billion a year in revenue. The latter should still have major growth ahead as the company is still early in selling ads for its Prime Video streaming service. Chipping InAmazon’s capital spending per quarterSource: the companyNote: Combines capital expenditures with equipment leases2019’20’21’22’23’2402.55.07.510.012.515.017.520.022.5$25.0billion

As far as AI goes, Amazon Chief Executive Officer Andy Jassy used Thursday’s call to describe it as a “multibillion-dollar revenue run rate business” now that is growing three times as fast as the company’s AWS cloud unit was growing at the same point in its lifespan. He said he expects to spend more next year than the $75 billion in capex Amazon is planning for this year, implying a notable step up for a company that averaged a $54 billion annual outlay over the past five years. 

If Jassy can keep the goods and ads flowing, investors will likely stay on board.