AI demand is driving growth and increased spending in Amazon's cloud business

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Amazon reported a double-digit increase in quarterly sales as the company began to capitalize on the “once-in-a-generation opportunity” of generative artificial intelligence and strong advertising demand, driving shares higher in after-hours trading on Thursday.

As companies look into developing and implementing generative AI tools, they need more and more cloud capacity to store their data. That's “an unusually large, perhaps once-in-a-lifetime opportunity” for Amazon's cloud business, said Andy Jassy, ​​the company's chief executive.

Sales at Amazon Web Services, a key profit driver for the e-commerce group, rose 19 percent year-on-year to $27.5 billion. Jassy said AWS already has a “multi-billion dollar” AI business that has seen “triple-digit” revenue growth, but did not provide specific numbers.

The AI ​​onslaught has also brought significant capital expenditure. Amazon spent $22.6 billion on property, plant and equipment in the quarter, up from $12.5 billion a year earlier. “The faster we grow demand, the faster we need to invest capital in data centers and network equipment and hardware,” Jassy said, estimating that Amazon would spend $75 billion this year and more next year.

“Our customers, businesses and shareholders will be pleased with this long-term direction as we pursue it vigorously,” he added.

The Seattle-based e-commerce company's total revenue rose 11 percent year over year to $159 billion, beating analysts' estimates. Amazon expects net sales in the current quarter – including the holiday shopping season – to be between $181.5 billion and $188.5 billion, in line with analyst forecasts of $186.4 billion.

Net profit in the period was $15.3 billion, well above analyst estimates of $12.2 billion and rose more than 50 percent year-on-year. Revenue from Amazon's advertising business rose 19 percent to $14.3 billion.

Amazon shares, which have risen nearly 25 percent year to date, rose 6 percent in after-hours trading, pushing the company's market valuation to more than $2 trillion.

Amazon's market capitalization has more than doubled in the last five years, driven by growing cloud and advertising businesses as well as increasing margins in its core retail business. Wall Street reacted negatively to Amazon's decline in operating margins last quarter, but the company recovered from 10 percent to 11 percent in the current quarter.

The group now sees generative AI as a primary source of future growth. Amazon, which recently called employees back to the office five days a week, is in a fierce race with rival “hyperscalers” Meta, Microsoft and Alphabet for a share of the booming AI market.

According to Gary Robinson, partner at Edinburgh-based asset manager Baillie Gifford, an Amazon investor, generative AI is “cloud 2.0”. The technology would have the potential to dramatically reduce operating expenses and could ultimately add trillions of dollars in value and “expand the total addressable market for hyperscalers by an order of magnitude,” he said.

But investors are also looking for evidence that the effort will pay off. Microsoft's shares fell 6 percent on Thursday even as the company reported double-digit gains in quarterly profits, after the company warned that AI spending would continue to rise and said growth in its cloud division had slowed current quarter has cooled down.

On its results and metas, US stocks suffered their worst day in nearly two months on Thursday as Big Tech companies dragged the Nasdaq and S&P 500 lower.