Amazon.com is anticipated to join Google and Microsoft on Thursday in announcing a significant increase in capital expenditure on artificial intelligence, as major technology companies race to capitalize on the booming AI technology. The e-commerce giant's capital investments, primarily for constructing cloud and generative AI infrastructure, are expected to have surged by 43 percent in the second quarter to $16.41 billion, according to data from LSEG. This marks an increase of approximately $1.5 billion from the preceding three months.
This substantial spending is also expected to exert pressure on Amazon's margins, overshadowing the benefits from cost reductions and supply chain efficiencies that are enhancing the profitability of its retail division. Amazon's Amazon Web Services (AWS) has long been the leader in the cloud computing market, but it has faced fierce competition from Microsoft in recent quarters, particularly after Microsoft introduced AI-powered services to its Azure cloud business.
In response, Amazon has formed partnerships with companies like Anthropic and provided startups with free credits to cover the costs 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. Microsoft and Google's parent company, Alphabet, have also announced earlier this month that they will continue to invest heavily, despite the longer-than-expected time for AI to yield returns, which has negatively impacted Big Tech stocks whose valuations have soared this year due to the promise of AI.
Amazon's capital expenditure will undoubtedly be closely scrutinized. It has been slow to adopt AI and is more focused on smaller companies that have struggled in the high-interest-rate environment, according to Ben Barringer, an analyst at Quilter Cheviot. "We anticipate AWS to accelerate its AI development in the future," he said. Amazon shares have increased by about 23 percent this year. However, the stock has declined by more than six percent since July 8, when it reached a record high, part of a broader market sell-off led by US megacaps.
Growth at AWS is likely to have remained consistent with the previous quarter at just over 17 percent, according to LSEG data. However, Morgan Stanley analysts noted that "AWS needs to achieve growth of 18 percent or more to... reassure investors about AWS's AI positioning and its capability to sustain high-teens growth through this period of heavy capital expenditure." As a result of the increased spending, Amazon's gross profit margin growth is expected to have decelerated to 1.3 percent in the April-June quarter, compared to 2.6 percent in the previous quarter and an average of 2.7 percent over the past two years.
Growth in Amazon's North American retail business likely slowed to eight percent between April and June, from 12.3 percent in the January-March quarter, amid indications of a broader slowdown in consumer spending and increased competition from new and rapidly growing Chinese players such as Temu and Tiktok Shop, which are attracting more US shoppers. Amazon's total revenue is expected to have increased by 10.6 percent to $148.56 billion, marking the slowest growth in five quarters.
