Amazon lifts spending outlook as AWS growth offsets AI cash pressures

Strong quarter for AWS and group revenue

For the quarter ended June 30, Amazon’s group-wide revenue reached $200.6 billion, surpassing analysts’ estimates of $196.16 billion. AWS sales rose 37% year-on-year to $42.2 billion, marking the division’s fastest growth rate in 18 quarters. CEO Andy Jassy said on the post-earnings call that AWS could eventually generate a trillion dollars in annual revenue “in time.”

Earnings per share came in at $5.75. The figure was not directly comparable with consensus expectations because it included a large one-time gain from investments. Net income incorporated $53.4 billion in non-operating pre-tax other income, primarily tied to Amazon’s investment in AI start-up Anthropic.

Escalating AI investments and impact on cash flow

Amazon increased its full-year spending forecast to $220 billion, up by $20 billion, citing higher memory chip costs. Trailing 12-month capital expenditures rose to $173 billion, with the company stating that the sharp increase in property and equipment purchases mainly reflected AI-related investments. These investments are intended to expand cloud capacity and AI services.

The ramp-up in AI spending has put pressure on free cash flow. Amazon reported negative free cash of $7.6 billion, which analysts at Vital Knowledge described as illustrative of “the cash pressures facing hyperscalers as they race to stay ahead in the AI race.” Despite these concerns, the market reacted positively to the revenue beat and AWS performance, with Amazon’s shares rallying nearly 10% in after-market hours.

Outlook for third quarter

For the third quarter, Amazon projected revenue between $197 billion and $202 billion, below analysts’ consensus estimate of $203.9 billion. The company forecast operating income in a range of $22.5 billion to $26.5 billion, compared with $17.4 billion in the same period a year earlier. The guidance reflects expectations of continued profitability improvement even as high levels of AI-related capital spending persist.

FAQ

What drove Amazon’s second-quarter revenue beat?
Amazon’s revenue beat was primarily supported by strong growth in its cloud-computing division, Amazon Web Services, which posted 37% year-on-year sales growth to $42.2 billion.

How is AI spending affecting Amazon’s financials?
Heavy investment in AI infrastructure and related property and equipment has contributed to negative free cash of $7.6 billion and higher capital expenditures, while also supporting expanded cloud capacity and AI services.

What is Amazon’s updated spending forecast?
Amazon raised its full-year spending forecast to $220 billion, an increase of $20 billion, citing higher memory chip costs and expanded AI-related investments.

How does Amazon’s third-quarter revenue outlook compare with expectations?
Amazon expects third-quarter revenue between $197 billion and $202 billion, which is below the analysts’ consensus estimate of $203.9 billion.