Amazon to increase AI spending amidst Big Tech surge

Tech giant Amazon.com is set to follow Google and Microsoft in reporting a surge in capital spending on artificial intelligence (AI) as Big Tech companies seek to leverage the rapidly growing technology, reports Reuters. According to LSEG data, Amazon's capital investments in cloud and generative AI infrastructure are expected to have risen by 43% in Q2, reaching $16.41 billion, which indicates a significant increase of approximately $1.5 billion from the previous quarter.

While this increased spending showcases Amazon's dedication to staying ahead in the industry, it may also place pressure on the company's margins, outweighing the benefits derived from cost-cutting measures and efficiency improvements within their retail unit.

Although Amazon Web Services (AWS) has been at the forefront of the cloud-computing market for some time, it has encountered stiff competition from Microsoft in recent quarters. This competition, coupled with the increased utilization of AI-powered services by Microsoft's Azure cloud business, has prompted Amazon to respond with strategic alliances with companies like Anthropic and the provision of free credits to startups for utilizing major AI models. Furthermore, Amazon named a new head for their AWS unit in May, signaling a commitment to accelerated AI development.

Notably, Microsoft and Google's parent company, Alphabet, have also expressed intent to forge ahead with AI investments despite a longer timeline for returns than expected, causing a decline in the valuations of Big Tech stocks that had previously soared due to AI potential.

Quilter Cheviot analyst Ben Barringer notes that scrutiny will be placed on Amazon's capex spend due to their slower adoption of AI and emphasis on smaller enterprises that have struggled in the current high-interest-rate environment. However, he predicts that AWS will ramp up its AI development in the near future.

While Amazon shares have risen by approximately 23% this year, they have also experienced a decline of over 6% since July 8 amidst a broader market selloff driven by U.S. megacaps.

LSEG data suggests that AWS growth in Q2 likely mirrored the previous quarter's, standing slightly above 17%. Nevertheless, Morgan Stanley analysts stress the need for AWS to maintain consistent growth of over 18% in order to reassure investors about its AI positioning and its potential for high-teens growth during this period of substantial capex investment.

As a consequence of increased spending, Amazon's gross profit margin growth is expected to be 1.3% in the April-June quarter, down from 2.6% in the prior quarter and an average of 2.7% over the past two years.

Furthermore, Amazon's North American retail business may have experienced reduced growth, slowing to 8% between April and June compared to 12.3% in the January-March quarter. This slowdown could be linked to a broader consumer spending decline and competition from emerging Chinese players such as Temu and Tiktok Shop, which continue to attract U.S. shoppers.

Given these factors, Amazon's total revenue is projected to have increased by 10.6% to reach $148.56 billion, marking the slowest rise in the past five quarters.

Earlier SSP reported that Meta will let users to create custom AI characters.