Latest / Bloomberg Intelligence / Instant Reaction: Amazon Reports Strong Cloud Unit Sales on Rising AI Demand

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Instant Reaction: Amazon Reports Strong Cloud Unit Sales on Rising AI Demand · Bloomberg Intelligence

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  Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
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  Speaker 2: Shares an Amazon kind of bouncing around right now, but
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  Speaker 2: rallying in the after hours four point eight percent, gaining
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  Speaker 2: as much as six percent earlier. This after our first
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  Speaker 2: quarter earnings per share beat estimates. We did see that
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  Speaker 2: results came in way ahead of estimates, including the key
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  Speaker 2: AWS segment, extending the company's recent streak of beating estimates.
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  Speaker 2: Second quarter sales and operating income guidance did though come
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  Speaker 2: in a touch soft.
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  Speaker 1: All right, So let's get to it with us as
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  Speaker 1: Bloomberg Intelligence senior Alys Putnamgoyle and Anna Ragrana on Amazon
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  Speaker 1: and their outlook again, the stock up about four point
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  Speaker 1: six percent. Gosh, not sure where to start here because
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  Speaker 1: there's so many moving parts, honourg let me start with
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  Speaker 1: you in terms of we always think about AWS, but
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  Speaker 1: tell us about from your perspective, what you what jumps
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  Speaker 1: out for you for Amazon?
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  Speaker 3: Yeah, I would say AWS, Madgins. I mean, I just
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  Speaker 3: can't believe how big this number is. Thirty seven point
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  Speaker 3: six percent operating margins compared to last years twenty four percent,
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  Speaker 3: So that's almost you know, fourteen percent increes and that
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  Speaker 3: that is this phenomenal and basically shows the scalability of
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  Speaker 3: this business model. And you know, frankly speaking, we weren't
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  Speaker 3: expecting these kinds of margins for several years out. So
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  Speaker 3: I think this is this should be really good signed
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  Speaker 3: for investors that this is really a good business model,
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  Speaker 3: an rock.
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  Speaker 2: How do they do this? Given that Microsoft is catching up,
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  Speaker 2: given that Google's alphabet's Google is catching up? How did
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  Speaker 2: Amazon pull this off? How did they pull off these margins?
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  Speaker 3: I think they did a lot of cost rationalization over
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  Speaker 3: the last few years. They remember all the you know,
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  Speaker 3: layoffs and things that we heard about, So I think
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  Speaker 3: that has to do with it. Now, I mean, to
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  Speaker 3: be very honest, I think this is going to be
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  Speaker 3: a time that these margins will over time go a
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  Speaker 3: little bit down because of new investments in generative AI
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  Speaker 3: and you know, things that they have to do to
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  Speaker 3: expand the capacity of their data centers. So at the
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  Speaker 3: same time, I mean, you've never seen thirty seven point
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  Speaker 3: six percent margins for AWS before, all.
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  Speaker 1: Right, so forgive me punam, come on in, because yeah,
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  Speaker 1: I mean the retail side of the business is really
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  Speaker 1: super important too, So talk to us about what we
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  Speaker 1: saw on that side.
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  Speaker 4: Sure, the retail numbers were actually just in line, so
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  Speaker 4: they met expectations and they looked at that and advertising.
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  Speaker 4: I think the story really is on AWS. That's where
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  Speaker 4: the beat came from. But I would say, you know,
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  Speaker 4: the guidance is light of expectations, and that may have
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  Speaker 4: something to do with online because if you recall the
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  Speaker 4: first quarter, it did have an earlier easter. So some
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  Speaker 4: of the numbers that you see on the online side
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  Speaker 4: being strong and inline is thanks to that earlier easter
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  Speaker 4: and the spring sale that they had, which wasn't there
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  Speaker 4: last year. So some of the weakness that we're seeing
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  Speaker 4: in the guidance maybe due to the online business that
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  Speaker 4: we'll find out when they start talking on the call.
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  Speaker 2: Put what about advertising here? This is something that not
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  Speaker 2: just on the Prime video which is relatively new, but
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  Speaker 2: the business over the last few years has grown massively,
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  Speaker 2: and when it comes to the search function, talk to
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  Speaker 2: us about what you saw with advertising this quarter.
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  Speaker 4: Advertising was strong, once again relatively inline with expectations to
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  Speaker 4: a little better. So we think that business continues to
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  Speaker 4: grow at a twenty plus percent clip, and we think
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  Speaker 4: that will continue, especially with the layering on of the
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  Speaker 4: Prime video advertising business. What I'd say there is. You know,
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  Speaker 4: when you think about the two big businesses that it
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  Speaker 4: has outside of retail, they're very, very high margin businesses,
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  Speaker 4: both advertising and AWS. So when we see the cash
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  Speaker 4: flow generation that we saw in the quarter, it's really
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  Speaker 4: thanks to these two businesses growing at the rate that
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  Speaker 4: they're growing.
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  Speaker 1: Anna Rock, I want to bring you back in because
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  Speaker 1: you know, one of the previews that we had on
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  Speaker 1: the Bloomberg today is, you know, Amazon earnings to bring
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  Speaker 1: more scrutiny for AI tethered stocks and just saying how
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  Speaker 1: kind of the bar was high coming off of Alphabet
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  Speaker 1: and Microsoft last week right where they showed, hey, listen,
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  Speaker 1: all this money that we're spending on AI, it's paying
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  Speaker 1: off for us. We're trying to kind of find where
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  Speaker 1: the AI story and what it's doing for Amazon. What
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  Speaker 1: can you tell us there?
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  Speaker 3: Yeah, and if you look at it, they launched a
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  Speaker 3: brand new product today called Amazon Q. You're going to
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  Speaker 3: see a lot of new enterprise products being launched by
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  Speaker 3: AWS because you know, one of what there are one
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  Speaker 3: ways to look at it is on the consumer chat
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  Speaker 3: GPT kind of stuff. They're not the player over there.
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  Speaker 3: They are more selling AI to corporations or large companies. Now,
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  Speaker 3: that's going to take time to build up, which is
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  Speaker 3: one of the reasons I'm saying that this high margin
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  Speaker 3: of thirty seven percent thirty seven point six percent on
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  Speaker 3: Amazon Web Services is not going to last forever. It's
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  Speaker 3: going to go down slowly over the next few years. Now,
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  Speaker 3: that's not a bad thing because in a scalable model
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  Speaker 3: like this to you know, be able to give some
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  Speaker 3: of that back to gain revenue. I think it's it's
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  Speaker 3: a long term really positive sign for AWS.
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  Speaker 2: Honor rog one hundred billion dollar annual revenue run rate
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  Speaker 2: for AWS. That number a surprise.
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  Speaker 3: Oh no, I mean we have, we have, we wrote
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  Speaker 3: a big report and we don't see a reason why
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  Speaker 3: this won't be two hundred billion one day. The question
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  Speaker 3: only is how long it's going to take. That's the
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  Speaker 3: big question, is whether it's going to take five years
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  Speaker 3: to get there or six years, seven years. But the
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  Speaker 3: end markets are so large, you know, we remain confident
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  Speaker 3: that it's going to hit two hundred billion over the
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  Speaker 3: next you know, somewhere between six to seven years.
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  Speaker 1: Poonam, what are they going to do? Like, what are
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  Speaker 1: the numbers we were just talking about with our TV colleagues.
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  Speaker 1: Operating cash flow increased eighty two percent to ninety nine
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  Speaker 1: point one billion for the trailing twelve months compared with
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  Speaker 1: fifty four point three billion for the trailing twelve months
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  Speaker 1: that ended in March thirty first, twenty twenty three. They
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  Speaker 1: got a lot of money coming in. Like you know,
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  Speaker 1: there was some speculation, do they do a dividend, do
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  Speaker 1: they do buy back? Like what do you want to
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  Speaker 1: be seeing that they do with their cash. Certainly on
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  Speaker 1: the retail side of things.
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  Speaker 4: I think while ad mesters would like a dividend and
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  Speaker 4: buy back, I think they're going to invest back in
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  Speaker 4: the business. So Tiana Rox points, you know, I think
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  Speaker 4: we are going to see capex right on the AWS side, especially,
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  Speaker 4: and they've said that they've said that in the past
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  Speaker 4: that they do plan to take Capex up there. So
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  Speaker 4: we do see them spending more there. But that cash
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  Speaker 4: full generation is only going to go higher. You know,
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  Speaker 4: these margins that they're generating on the advertising business and
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  Speaker 4: the AWS business, and as those businesses scale even further,
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  Speaker 4: are going straight to the bottom line and offsetting any
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  Speaker 4: losses that they have. If that in the retail business,
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  Speaker 4: you know, you said.
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  Speaker 1: To Punham that overall guidance for the company, and that
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  Speaker 1: seems to be the thing that was certainly we highlighted
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  Speaker 1: on the Bloomberg In terms of their revenue guide and
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  Speaker 1: second quarter net sales, they see one hundred and forty
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  Speaker 1: four billion tw one hundred and forty nine billion. The
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  Speaker 1: street estimate is above that range at one hundred and
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  Speaker 1: fifty point twenty one. You said, you know, might be
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  Speaker 1: because of the online business. What's the question you want
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  Speaker 1: to be hearing? Are that analysts are asking specifically on
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  Speaker 1: that call.
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  Speaker 4: I think the first question is how much did in
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  Speaker 4: earlier easter help them in the spring sale? How much
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  Speaker 4: did that contribute to that seven percent increase that they
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  Speaker 4: saw in online sales first party, because if that was
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  Speaker 4: a few percentage points, and that kind of answers the
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  Speaker 4: question going into the second quarter. And then the other
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  Speaker 4: question I'd ask on the retail side is you know,
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  Speaker 4: how are they doing in terms of just gaining share
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  Speaker 4: online against these rising threats from TIMU and She and
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  Speaker 4: I don't know if they'll ever answer that, but clearly
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  Speaker 4: those things are growing very rapidly, and is there something
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  Speaker 4: else that they're doing to offset those competitive threats?
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  Speaker 2: Honor rog I'm just taking some time to look through
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  Speaker 2: the cloud results here. And one thing that was notable
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  Speaker 2: going into this report is that there was some discussion
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  Speaker 2: about sales growth at AWS slowing to a record low
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  Speaker 2: last year, businesses cutting back on tech spending. They wanted
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  Speaker 2: to bring those computing bills that balloon during the pandemic
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  Speaker 2: under control. Now you have Jasse out in a statement
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  Speaker 2: saying essentially that the combination of companies renewing their infrastructure
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  Speaker 2: modernization efforts and the appeal of aws's AI capabilities is
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  Speaker 2: reaccelerating aws's growth rate. Is that him saying companies are
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  Speaker 2: done cutting back on their cloud spend. Is that him
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  Speaker 2: saying the worst is behind us when it comes to
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  Speaker 2: company tiping their bell.
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  Speaker 3: Yeah, And frankly speaking, he had to say that because
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  Speaker 3: both Microsoft and Google came up with very good numbers. Now,
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  Speaker 3: when you look at AWS commitments, you know, they gave
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  Speaker 3: out a figure called cloud commitments, which is people signing
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  Speaker 3: long term contracts even in the last you know, I
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  Speaker 3: would say one and a half to two years. Those
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  Speaker 3: numbers have been very strong, twenty percent, thirty percent even higher,
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  Speaker 3: which means people are making those commitments they're not just
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  Speaker 3: using them, They're not using those cloud credits. They're just
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  Speaker 3: pacing themselves into a variable cost model, and then when
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  Speaker 3: economic conditions improve for their clients, they will, you know,
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  Speaker 3: get the consumption up. And that's what we're seeing right now.
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  Speaker 1: Anareg, what's your number one question for the call?
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  Speaker 3: The number one question is can you break out your
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  Speaker 3: AI workloads versus the non AI workloads on AWS? Because
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  Speaker 3: Microsoft's already saying so, if Microsoft sales growth has let's say,
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  Speaker 3: you know, thirty percent, seven percentage points of that is
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  Speaker 3: because of AI, I want to know that exact number
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  Speaker 3: for aw US. I don't think they're going to give
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  Speaker 3: it this time, but that that's my number one question.
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  Speaker 2: Hey, we forgive us, but we got earnings crossing again
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  Speaker 2: right now. Shares AMD down about four point two percent
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  Speaker 2: in the after hours. Second quarter revenue coming in at
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  Speaker 2: five point four to six billion dollars estimates were for
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  Speaker 2: the midpoint there five point seven first quarter just atdps,
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  Speaker 2: did beat estimates. Should note also operating margin coming in
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  Speaker 2: above estimates at twenty one percent versus estimates of twenty
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  Speaker 2: point eight percent. First quarter capex, though coming in way
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  Speaker 2: above estimates one hundred and forty two million dollars. Carrol
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  Speaker 2: estimates were for one hundred and eighteen point four million dollars.
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  Speaker 1: Amd On now down more than five percent. In the
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  Speaker 1: after market, Amazon, we continue to talk about it. Their
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  Speaker 1: cloud unit posting the strongest sales growth in a year,
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  Speaker 1: a sign that the retailer's most profitable unit is recovering
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  Speaker 1: from a slump as businesses resume spending on technology projects.
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  Speaker 1: And we've seen the shares certainly rally here in the
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  Speaker 1: after market. We're talking with Pudam Goyle and Honor Agrana
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  Speaker 1: of our intelligence Bloomberg Intelligence team put them, is there
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  Speaker 1: anything in here too that you get an idea of
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  Speaker 1: kind of how consumers are doing? Certainly, Amazon is such
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  Speaker 1: a great key metric when it comes to this what
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  Speaker 1: are you seeing in that front?
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  Speaker 4: I think Amazon continues to take share. So when you
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  Speaker 4: look at the consumer dynamics today in retail, Amazon has
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  Speaker 4: been taking share. Most of the consumer is still cautious,
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  Speaker 4: they're still training down to value, they are spending where
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  Speaker 4: they want to spend, and they're spending more on staples
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  Speaker 4: than they are on discretionary. So I think the numbers
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  Speaker 4: that they've posted today show that they continue to take share, and.
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  Speaker 1: I just want to point in Amazon shaares now are
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  Speaker 1: only up about one percent here, so they've definitely pared
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  Speaker 1: back some of their earlier moves.
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  Speaker 2: Put them on a report like this. I see the
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  Speaker 2: way that Amazon is dominating when it comes to cloud,
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  Speaker 2: when it comes to advertising, when it comes to online retail,
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  Speaker 2: They're in healthcare now, They're getting everywhere. And I guess
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  Speaker 2: my question for you is about regulatory risk here. FTC
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  Speaker 2: has a suit filed against the company, and I'm wondering
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  Speaker 2: how investors should think about regulatory risk here. I mean,
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  Speaker 2: this is a close to two trillion dollar company.
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  Speaker 4: Well, we have analysts that cover it on the regulatory side,
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  Speaker 4: and I think so far the bi opinion is that
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  Speaker 4: we don't see a big risk to the Amazon business
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  Speaker 4: as it stands today, though we also don't see a
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  Speaker 4: breakup happening. We put very low probability on that. You know,
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  Speaker 4: when you think about the different businesses that Amazon competes,
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  Speaker 4: and it is a dominant share in many of them,
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  Speaker 4: but it's also a very small share in many of them,
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  Speaker 4: like the few that you mentioned healthcare. You know, Amazon's
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  Speaker 4: still a very small player in the healthcare business. In
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  Speaker 4: the grocery business where they're trying to make in roads,
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  Speaker 4: they're very small there. They are a large retailer, but
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  Speaker 4: most of their retail business is third party operated more
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  Speaker 4: than sixty percent. So there's arguments to be made on
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  Speaker 4: both sides, but our opinion at BI is that it's
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  Speaker 4: not going to be easy for the FTC to force
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  Speaker 4: a breakup here.
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  Speaker 2: I see Honor rog just nodding his head from sgo
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  Speaker 2: right now. I'm wondering your thoughts on this an a
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  Speaker 2: rug and if you have anything to add when it
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  Speaker 2: comes to AWS, because certainly they're the dominant play. I mean,
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  Speaker 2: they invented the category, no question.
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  Speaker 3: Yeah, but they invented the category and Microsoft's been closing
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  Speaker 3: that chair like for a while now, and in AI
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  Speaker 3: Microsoft doing far better. Googled growing much faster, Microsoft going
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  Speaker 3: even faster. So nobody can say that they dominate the
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  Speaker 3: cloud space right now. You know, they have to watch
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  Speaker 3: the heels at any given time you see the number
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  Speaker 3: of product releases from AWS in the amount of you know,
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  Speaker 3: marketing they're putting behind it just to say that they're
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  Speaker 3: not behind Microsoft, So I would not say that they
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  Speaker 3: are monopoly when it comes to cloud. I mean, there's
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  Speaker 3: so many players at this point.
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  Speaker 1: Well's so funny that you say that I'm reading to
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  Speaker 1: the press release right now and there's like a ton
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  Speaker 1: of stuff on AI. But it's a lot of It's
• 12:46
  Speaker 1: just a lot of stuff, And I guess, you know,
• 12:49
  Speaker 1: what are you looking for an a rag? Is you
• 12:51
  Speaker 1: read through like what they're doing here in Amazon Q
• 12:53
  Speaker 1: and what they're doing with salesforce? Like like what is
• 12:56
  Speaker 1: it that you're looking for as you pars through? What's
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  Speaker 1: a lot of words.
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  Speaker 3: Yeah, So the way you want to think about it,
• 13:02
  Speaker 3: Microsoft disclose some numbers. When we back into that, it
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  Speaker 3: shows us that Microsoft just on their cloud business is
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  Speaker 3: generating a billion dollars a quarter at this point, which
• 13:13
  Speaker 3: is a quarterly revenue of four billion dollars. Amazon's not
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  Speaker 3: going to give any close to number like that. They
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  Speaker 3: are nowhere close to that. So I think that's basically
• 13:21
  Speaker 3: shows that the competition is really tough right now and
• 13:24
  Speaker 3: they have to launch all these products in order for
• 13:27
  Speaker 3: enterprises or companies to embrace it so that they can
• 13:30
  Speaker 3: down the road give that number out. So if they
• 13:32
  Speaker 3: give a number out, I think it'll be a very
• 13:34
  Speaker 3: very different ballgame tomorrow, but I doubt that's going to
• 13:37
  Speaker 3: happen today.
• 13:38
  Speaker 2: Put on my I'm you know, in our conversations last
• 13:40
  Speaker 2: week about meta platforms, we spoke to your colleague Man Deep,
• 13:43
  Speaker 2: saying a lot about how advertising was, how AI had
• 13:48
  Speaker 2: meta platforms was being used to really help with advertising,
• 13:52
  Speaker 2: And I kind of want to frame the same question
• 13:54
  Speaker 2: to you. It's about e commerce and how what Amazon
• 13:58
  Speaker 2: is doing when it comes to We talk a lot
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  Speaker 2: about that in the context of AWS, but how does
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  Speaker 2: it help the core business getting people to buy more
• 14:07
  Speaker 2: stuff and get more stuff delivered at Amazon?
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  Speaker 4: Yeah, I mean AI. Generative AI especially is crucial for retail.
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  Speaker 4: In fact, we think it's one of the biggest drivers
• 14:17
  Speaker 4: to the search or the next leg of growth that
• 14:19
  Speaker 4: you're going to see online. When you think about generative
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  Speaker 4: AI and you think about search, right, we go shop online,
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  Speaker 4: we put something in the search bar, and we get
• 14:28
  Speaker 4: a million responses. Half of them, more than half of
• 14:30
  Speaker 4: them are not relevant. So as you increase the relevancy
• 14:33
  Speaker 4: of the search, you're going to also increase conversion because
• 14:37
  Speaker 4: you're giving customers what they want, so huge huge ROI
• 14:40
  Speaker 4: and getting the search right. And then outside of that,
• 14:43
  Speaker 4: you know, there is there are a lot of tools,
• 14:45
  Speaker 4: whether it's using genai to create your marketing, to create
• 14:49
  Speaker 4: product there are so many things that you could do
• 14:51
  Speaker 4: with genai and on the e commerce product side that
• 14:54
  Speaker 4: are really beneficial to the customer experience. And in fact,
• 14:58
  Speaker 4: you know, outfitting yourself for example, using AI tools, using
• 15:01
  Speaker 4: visual tools to be able to create these scenarios. It's
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  Speaker 4: all about increasing conversion when it comes to using AI
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  Speaker 4: for e commerce.
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  Speaker 1: All right, guys, I'm still watching shares of Amazon up
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  Speaker 1: about two point six percent this as it we mentioned
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  Speaker 1: earlier reporting a strong cloud unit sales, rising AI demand.
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  Speaker 1: But again that second quarter net sales forecast is a
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  Speaker 1: little bit light than what the street is forecasting. What
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  Speaker 1: could they say analog on the call that would make
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  Speaker 1: you a little bit more nervous because right now investors
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  Speaker 1: seem to be pretty pleased with this report.
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  Speaker 3: Yeah, I mean in the cloud side, if they go
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  Speaker 3: out and say that the growth for next quarter is
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  Speaker 3: going to be much lower than what it is, and
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  Speaker 3: it's a cause for concern because their competitors have not
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  Speaker 3: said that. So one would imagine that if the current
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  Speaker 3: quarter growth rate was around seventeen percent, they should grow
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  Speaker 3: in that same brain sixteen seventeen percent in the next quarter. Also,
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  Speaker 3: if they go out inside it's only going to be
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  Speaker 3: ten twelve eleven, then I think that's a problem.
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  Speaker 1: Same question to you put and what could they say
• 15:58
  Speaker 1: on the call that might make you be a little
• 15:59
  Speaker 1: bit more head in on this company.
• 16:02
  Speaker 4: If they say retail growth or the e commerce business
• 16:04
  Speaker 4: has slowed to little single digits, Okay, I would be
• 16:07
  Speaker 4: a little concerned or even turn negative.
• 16:08
  Speaker 1: All right, listen, We so appreciate both of you weighing
• 16:11
  Speaker 1: in on a company that's not a little complicated. I
• 16:14
  Speaker 1: don't know that I want to say complicated, but yeah,
• 16:16
  Speaker 1: a lot of moving pieces and so we do. Yeah,
• 16:20
  Speaker 1: and so great to get both of their perspectives. Put
• 16:22
  Speaker 1: them Goyle, she's senior analysts for e commerce at a
• 16:25
  Speaker 1: leisure off price retail on Zoom from India.
• 16:29
  Speaker 2: It's two am, so thank you put them.
• 16:32
  Speaker 1: Oh my god, we owe you, We owe you. And
• 16:34
  Speaker 1: Anna Ragrana always so helpful when we have to go
• 16:37
  Speaker 1: through these reports. Senior technology analyst Bloomberg Intelligence joining us
• 16:40
  Speaker 1: from our Chicago But are really both of them, We
• 16:42
  Speaker 1: so so appreciate the insight