Amazon earnings: AWS growth meets a cautious holiday outlook

By Daniel Okafor

Amazon shares fell more than 6% in after-market trading when it posted $20.69bn in third-quarter net income and issued a cautious holiday sales forecast.

The Seattle-based e-commerce company released its fiscal third-quarter results Thursday. The quarter ended 30 September, and the current fourth quarter includes the critical holiday shopping period.

Investors focused on the core business as they weighed higher sales, lower profit and a cloud operation that continued to expand at a faster pace.

What did Amazon miss?

Amazon reported sales of $201.94bn, compared with $180.17bn in the year-ago quarter. Net income fell from $21.19bn, or $1.95 per share, to $20.69bn, or $1.89 per share.

FactSet analysts expected $1.97 per share on sales of $202.2bn. Amazon missed both headline measures.

The company paired higher sales with lower profit. That result mattered because investors were already testing whether Amazon’s large artificial-intelligence spending program would begin to produce returns.

Amazon’s quarterly earnings have become a closely watched test for that AI payoff. The stock reaction showed the market placing greater weight on the core business than on the faster cloud result.

Can AWS offset the core-business pressure?

Amazon said sales in AWS rose 39.3% in the quarter ended 30 September. Growth accelerated from 37% in the previous quarter, and the company said 39.3% was its fastest growth rate in nearly five years.

The AWS acceleration was the report’s clearest operating signal. It did not change the market’s focus on the core business.

The cloud result gave investors a visible source of faster growth as Amazon continued to spend heavily on AI capacity. That spending makes AWS growth central to the investment case.

Why is Amazon raising investment so sharply?

Amazon said earlier this month it would hire 300,000 US seasonal workers for the shopping period, up from 250,000 last year. The hiring plan shows the company adding staff for the same shopping period covered by its cautious sales forecast.

Investors were also watching whether Amazon’s heavy AI spending had started to pay off. The spending scale explains why investors now read the AWS growth rate alongside the profit result.

Andy Jassy, the company’s CEO and president, disclosed to investors in July that Amazon expects capital spending, mostly on artificial intelligence, to total $220bn for this fiscal year.

That figure includes outlays on robots, semiconductors and satellites. The $220bn total compares with the $200bn investment plan announced in February, and sits well above the $128bn in capital spending for all of last year.

Jassy cited the higher cost of memory chips as the main reason for the increase.

Jassy told investors this past summer: “Even at the $220bn level, Amazon will not have enough capacity to meet all of its customers’ demands this year.”

Amazon’s AI challenge is therefore as much about delivering capacity as funding it. His warning means Amazon expects customer demand to exceed available capacity this year.

Why did Alphabet’s result matter?

Amazon’s report followed Alphabet’s late-Wednesday earnings release. The company behind Google and YouTube reported weaker growth for the summer than analysts expected.

Alphabet also reported that it burned through more cash during the latest quarter, measured by free cash flow. Purchases of property and equipment topped $51bn.

Alphabet’s stock plummeted on Thursday, erasing half a trillion dollars from its total value.

The result raised broader concern about cash consumption across the AI industry. That concern followed a large push to build datacenters and fill them with AI chips.

Amazon’s cloud growth remained strong, but its investment demands sat within the same capital-intensity debate.

What will the holiday quarter test?

Amazon forecast fourth-quarter net sales of $240bn to $247bn. The company said that represented 12% to 16% growth from the year-ago period.

FactSet analysts expected $244.16bn in sales, within Amazon’s range. The forecast therefore placed the burden on execution during the holiday shopping period.

Amazon enters the holiday quarter with a $240bn-to-$247bn sales forecast and a $220bn fiscal-year spending plan. Investors now face a sharper test: holiday demand must support the forecast while AWS growth must keep pace with the scale of spending.