Amazon’s top-to-bottom spending on AI is paying off

By Dave Lee

The storm clouds are finally starting to clear over the head of Amazon.com Inc Chief Executive Officer Andy Jassy.

After taking over from Jeff Bezos, Jassy has mostly been confronted with challenges. Regulators have been on his back. The e-commerce business needed some serious reining in after overexpanding during the pandemic. Amazon’s grocery stores have been a disappointment. He’s laid off thousands of employees and shut down some projects.

Amazon Web Services, the golden goose cloud business that has long girded the company’s profit margins, was under pressure from cash-strapped businesses seeking a better deal during the pandemic. Revenue growth slowed.

Then, when Microsoft Corp entered a partnership with OpenAI, there was worry that AWS’ market share might suffer as businesses flocked to invest in the artificial intelligence offered by Amazon’s biggest cloud competitor.

Jassy, who had been responsible for AWS’ rise as the division’s CEO before taking the top job, kept a level head. He assured investors that Amazon had been working on AI for years — long before ChatGPT set the tech world alight with the promise of world-changing possibilities.

Amazon’s message was that while OpenAI may have been grabbing headlines, investors should think of AWS as the Swiss Army knife for AI, one where businesses could run any number of cutting-edge AI models without worrying about shifting their sensitive data from one cloud provider to another.

To answer worries about the availability of computing power, which had driven up the cost of procuring Nvidia Corp. hardware to do AI training and inference, Amazon had already been making its own hardware for those purposes with its Trainium and Inferentia chips, something that Microsoft and others are rushing to catch up on. Underlining its seriousness with AI, Amazon bought a $4 billion stake in leading AI maker Anthropic, which said it would run its workloads on AWS.

On Tuesday, the company’s first-quarter earnings showed these investments are starting to pay off, prompting an after-hours stock price boost of as much as 6.5 per cent.

Jassy’s reassurances have proved accurate, and more good times are on the horizon. AWS posted its second consecutive quarter of accelerating sales growth, with client interest in AI contributing significantly, Jassy said. AWS now has an annual revenue run rate of $100 billion, with AI spending accounting for “multibillion” of those dollars.

As Jassy predicted, clients that had pulled back cloud investment in the “survival mode” of the pandemic have started to pick up the pace and shift more of their spending to the cloud.

“I think people have moved to newer initiatives that at a macro level I would describe as modernizing their infrastructure and then trying to drive value out of generative AI,” he said on a conference call to discuss the results.

Operating margin for AWS in the quarter was a record 37.6 per cent, thanks to cost cuts and heightened demand. In all, Amazon’s cloud business was “climbing out of what was a pretty tough year,” Jefferies analyst Brent Thill said on Bloomberg TV.

“Investors aren’t paying for Twinkies and toilet paper being delivered to your house. They’re paying for these high-margin, recurring businesses like AWS.”

The strong quarter meant Amazon could get away with vague pronouncements like saying it would “meaningfully” step up its capital expenditure this year to pay for all this AI infrastructure — without putting a figure on it.

Unlike Meta Platforms Inc, which was punished for saying its spending would increase, Amazon can get away with bigger investments because of its strong presence in multiple layers of the AI “stack”: the bottom infrastructure layer for AI model builders, the middle layer of developers working with AI, and the top layer of consumer-facing software applications like chatbots.

It all puts Amazon in excellent stead amongst this fiercely competitive AI crowd. The initial money is being made on the bottom and middle layer, but there’s no reason Amazon can’t have a commanding presence in consumer-facing AI as well — this week, it fully rolled out its competitor to Microsoft’s code-writing AI assistant, CoPilot.

In other words, Jassy has seized the agenda and set Amazon up to both sell the shovels and dig for the gold.