Under the pressure of AI investment, cloud demand shows a red light, Amazon's Q3 guidance falls short, and it fell more than 6% after hours | Financial Report Insights

Although AWS's sales in the second quarter maintained strong double-digit growth, Amazon's overall sales guidance for the third quarter fell short, signaling a downturn in cloud demand. At the same time, Amazon's profit guidance for the third quarter was lower than expected, reflecting the profit pressure faced by tech giants as they heavily invest in the field of artificial intelligence (AI).

After the U.S. stock market closed on Thursday, August 1, Amazon announced its financial data for the second quarter of the fiscal year ending June 30, 2024, and provided performance guidance for the third quarter.

1) Key Financial Data

Revenue: Net sales in the second quarter were $147.98 billion, a year-on-year increase of 10%. Analysts expected $148.78 billion, while the company guided for $144 billion to $149 billion, with a first-quarter year-on-year growth of 12.5%.

EPS: Diluted earnings per share (EPS) in the second quarter were $1.26, a year-on-year increase of 93.8%. Analysts expected $1.03, with a first-quarter year-on-year growth of 216%.

Operating Profit: Operating profit in the second quarter was $14.672 billion, a year-on-year increase of 91%. Analysts expected $13.59 billion, while the company guided for $10 billion to $14 billion, with a first-quarter year-on-year growth of 219%.

Operating Profit Margin: The operating profit margin in the second quarter was 9.9%, a year-on-year increase of 5.7 percentage points, with analysts expecting 9.13%.

2) Segment Revenue

E-commerce: Net sales for the e-commerce business in the second quarter were $55.39 billion, a year-on-year increase of 4.6%. Analysts expected $55.55 billion, with a first-quarter year-on-year growth of approximately 7%.

AWS: Net sales for the AWS business in the second quarter were $26.28 billion, a year-on-year increase of 18.7%. Analysts expected $25.98 billion, with a first-quarter year-on-year growth of nearly 17%.

Advertising: Net sales for the advertising business in the second quarter were $12.77 billion, a year-on-year increase of 19.5%. Analysts expected $13 billion, with a first-quarter year-on-year growth of approximately 24%.

3) Performance Guidance

Revenue: Net sales for the third quarter are expected to be $154 billion to $158.5 billion, with analysts expecting $158.43 billion.

Operating Profit: Operating profit for the third quarter is expected to be $11.5 billion to $15 billion, with analysts expecting $15.66 billion.

Following the release of the financial report, Amazon's stock price, which fell nearly 1.6% on Wednesday, quickly extended its decline, dropping more than 6% after hours.

Third-quarter revenue guidance may see the slowest growth in over a year and a half, while operating profit guidance exceeds expectations with a significant slowdown

Amazon's revenue and profit in the second quarter both slowed compared to the first quarter, with the sales slowdown of its largest business, e-commerce, exceeding Wall Street's expectations. The sales growth of the cloud business AWS was stronger than expected and the first quarter, but AWS's operating profit margin for the quarter slightly decreased by 35.52%.

Compared to the second quarter performance, Amazon's third quarter performance guidance has exposed bigger issues. Based on the guidance range, Amazon expects third quarter revenue to grow by about 8% to 11% year-on-year, with the mean below analysts' expectations close to the high end of the guidance. If this lower end of the guidance is accurate, Amazon's third quarter revenue will achieve the slowest growth since December 2022.

Comments suggest that this guidance raises concerns about the bleak prospects of Amazon's revenue growth in the cloud business. The lower-than-expected third quarter revenue guidance indicates that in the uncertain economic environment, Amazon's corporate clients are strictly controlling costs, leading to a subdued demand for its cloud computing services.

Amazon's operating profit guidance range for the third quarter is all below analysts' expectations. Based on the guidance range, Amazon expects third quarter operating profit to grow by nearly 2.7% to about 33.9% year-on-year, even if the high end of the guidance is significantly slower than the first quarter's 91% growth, far less than the more than doubled growth rate in the first quarter, and the slowdown exceeds expectations. Analysts expected a growth of 39.8%, nearly 40% for the third quarter.

Comments state that the lower-than-expected profit guidance indicates that Amazon has invested more than expected in meeting the demand for AI services. Amazon CEO Andy Jassy has been cutting costs, focusing on the profitability of Amazon's main business of e-commerce, while investing heavily in AI services. Amazon has referred to AI services as representing a business with a revenue turnover rate of "tens of billions of dollars".

The market performance in this financial reporting season shows that investors are becoming increasingly impatient with tech companies' heavy investment in AI for profit. The shadow of costs is looming over the tech giants, and market concerns about the return on massive AI investments are growing.

Faced with market concerns, tech giants unanimously state that they will firmly "burn money". After announcing second-quarter financial reports last week, Alphabet and Google's CEO Sundar Pichai emphasized that for Alphabet, the risk of underinvestment in the AI field is far greater than the risk of overinvestment.

Meta and Microsoft, which announced their second-quarter reports this week, both expect to increase capital expenditures. Meta emphasized that capital expenditures in 2025 will increase significantly, with infrastructure costs being a key driver, which will continue to support AI research and product development. Brett Iversen, Vice President of Investor Relations at Microsoft, stated that the company will continue to increase spending to meet "strong customer demand", with capital expenditures expected to exceed the 24 fiscal year in 2025.

Wall Street News mentioned earlier that for companies, AI investment has become a survival issue rather than just a pursuit of incremental profitsDeutsche Bank analysis believes that, so far, revenue is mainly limited to the cloud business field, where companies train and operate AI models. Beyond the cloud business, signs of investment returns are more qualitative than quantitative, and the returns on AI investments are still difficult to measure in specific numbers