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Amazon’s cloud stabilizing, shoppers cautious heading into holiday season

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Reuters

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Oct 27, 2023

Amazon.com on Thursday said growth in its cloud business is stabilizing as it signed new deals, but warned that consumers remained wary about spending going into the holiday quarter.

Amazon

The company predicted a rise in revenue over the key holiday season that could still miss Wall Street expectations, as it reported strong third quarter results buoyed by a recent marketing blitz and faster delivery.

Shares in the company ricocheted after hours, rising, falling and ultimately rising 5%.
Facing an array of challenges to its business, Amazon is trying to keep its mantle as the world’s biggest cloud provider and online retailer.

The company has sought to bolster its cloud, answering rivals Google and Microsoft with a deal to invest up to $4 billion in chatbot-maker Anthropic and touting an AI service drawing thousands of users.

Amazon likewise has reorganized its delivery network to locate goods closer to shoppers, letting it fulfill orders faster than before, and more cheaply.

At the same time, it has faced an array of challenges, among them tight household budgets, businesses scrutinizing their cloud spending and a September lawsuit by the U.S. Federal Trade Commission, which accuses Amazon of inflating prices and wielding monopoly power.

The company is contesting the claims.

Against this backdrop, the company forecast revenue in the range of $160 billion and $167 billion for the all-important holiday quarter ending Dec. 31. Analysts polled by LSEG were expecting sales of $166.62 billion, at the higher end of Amazon’s guidance.

Sophie Lund-Yates, equity analyst at Hargreaves Lansdown, said Amazon’s ramp-up in seasonal hires boded well for consumer discretionary spending, to a point.

“We could be looking at a final spending push before a substantial pull back in the new year. So, this is a risk that will need monitoring closely,” she said.

Amazon’s fortunes are often tied to those of its cloud-computing division. Long a major source of profit, Amazon Web Services (AWS) saw growth slow down in earlier quarters. Rival Microsoft, the second-largest cloud provider by revenue after Amazon, meanwhile beat Wall Street estimates this week as its customers geared up for AI upgrades.

On a call with reporters, Amazon’s Chief Financial Officer Brian Olsavsky said efforts to help customers fine-tune how much they were spending in the cloud were “starting to slow down.”
CEO Andy Jassy added in a call with analysts that AWS was picking up the pace of signing and closing deals, among them large expansions with existing customers as well as first-time agreements. It also was piquing companies’ interest through AI.

He said in a statement: “Our AWS growth continued to stabilize.”
In total, AWS brought in revenue of $23.1 billion in the just-ended third quarter, compared with analysts’ expectations of $23.09 billion.

Amazon’s overall revenue in the third quarter rose 13% to $143.1 billion, beating Wall Street estimates of $141.41 billion, according to LSEG data. Net income rose to $9.9 billion in the third quarter from $2.87 billion a year earlier.

CFO Olsavsky said the company in general saw strong demand in sales categories such as beauty and health, although discretionary spending was lower.

“We still see customers remaining cautious about price, trading down where they can and seeking out deals,” he said.

Abating inflation helped lower some of Amazon’s transportation spending, somewhat offset by fuel costs, he said.

Several initiatives helped Amazon navigate the terrain. The company has said a third-quarter shopping blitz known as Prime Day notched its biggest sales day ever, while a follow-up promotion period was its largest October holiday kickoff to date.

Sales in Amazon’s North America segment increased 11% to nearly $88 billion in the third quarter, and the company reported a $4.3 billion operating profit in the business in that region compared with an operating loss a year earlier.

Amazon has cut costs aggressively since that loss. After planning 27,000 layoffs, or what had been 9% of its roughly 300,000-person staff starting last year, it has since revealed more role reductions, at Amazon Fresh stores, for instance.

Amazon’s same-day delivery services have also helped its margins by spurring shoppers to place more frequent and bigger orders. The retailer invested heavily in recent years to make the service available in more places.

© Thomson Reuters 2023 All rights reserved.



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