Amazon prepares to join Big Tech’s spending surge as AI race heats up

Amazon.com is expected to join Google and Microsoft on Thursday in reporting a rise in capital spending on artificial intelligence as big tech companies rush to capitalize on the booming technology.

The e-commerce giant’s capital investments – mainly for building cloud and generative AI infrastructure – are expected to have increased by 43% in the second quarter to $16.41 billion, according to LSEG data. This represents an increase of about US$1.5 billion compared to the previous three months.

High spending is also expected to pressure Amazon’s margins, outweighing the benefits of cost cuts and supply chain efficiencies that are helping the retail unit’s profitability.

The company’s Amazon Web Services (AWS) business has long dominated the cloud computing market, but has faced stiff competition from Microsoft in recent quarters after the Windows maker launched AI-based services in its Azure cloud business.

In response, Amazon has partnered with companies like Anthropic and offered free credits to startups that cover the cost of using leading AI models to increase market share for its Bedrock AI platform. It also named a new head of the AWS unit in May.

Microsoft and Google parent Alphabet also said earlier this month that they would continue investing, even if the return of AI takes longer than some investors expected. This has dragged down Big Tech stocks, whose valuations have soared this year on the promise of AI.

“Amazon’s investment spending will certainly be closely scrutinized. Adoption of AI has been slow and is targeted at smaller companies struggling in the high interest rate environment,” said Ben Barringer, analyst at Quilter Cheviot.

“We expect AWS to begin accelerating AI development going forward.”

Amazon shares are up about 23% this year. Shares have fallen more than 6% since July 8, when they hit a record high, part of a broader market sell-off led by U.S. megacaps.

Growth in AWS will likely have remained similar to the previous quarter, at just over 17%, according to LSEG data. But, Morgan Stanley analysts said, “AWS needs to grow more than 18% to… reassure investors of AWS (AI)’s positioning and its ability to generate mid-teens growth during this period of heavy investment.”

As a result of increased spending, Amazon’s gross profit margin growth is expected to have slowed to 1.3% in the April-June quarter, compared to 2.6% in the previous quarter and an average of 2.7%. % in the last two years.

Growth in its North American retail business likely slowed to 8% between April and June, from 12.3% in the January-March quarter, amid signs of a broader slowdown in consumer spending and some competition from new and Fast-growing Chinese players like Temu and Tiktok Shop are attracting more US shoppers.

Amazon’s total revenue is expected to have grown 10.6% to $148.56 billion – the slowest increase in five quarters.

(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)