Instant Reaction: Amazon Reports Cloud Sales Growth for Fifth Straight Quarter

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1:28Bloomberg Audio Studios, podcasts, radio, news. This is a breaking news update from Bloomberg. Instant reaction and analysis from our 3 ,000 journalists and analysts around the world. Shares of Amazon higher in the aftermarket. Let's get to it with our team, two members, killer members, if you will, of our Bloomberg Intelligence team. We're talking about Poonam Goyal. She's Bloomberg Intelligence Senior Analyst for E-Commerce and Athleisure and Anurag Rana, Bloomberg Intelligence Senior Technology Analyst. Pudum, let me kick it off with you in terms of Amazon. What's jumping out here for you? Look, it looks like broad-based strength across the board.

2:10The retail numbers were particularly good. And that was expected because we had the Prime Day shift moving in from 3Q to 2Q. So overall, really nice numbers here on the retail side. Consumers came to Amazon to shop prime day sales and the shift to online just continues to appear more and more apparent as we move through a tough consumer spending cycle. What's this third quarter net sales miss? $197 to$202 billion. The estimates were$204 billion, Puna. I think part of it is the prime day shift, right? When you think about - But analysts knew about that. So they should have - We don't know how much, right?

2:43We don't know how much in dollar volume has moved into Q. If you look at the beat that we saw, analysts were expecting revenues to be up, but they came in even higher than that, right? 13.7 % online revenues was the expectation and they came in at 15%. So a couple of billion dollars there could be part of the movement that we're seeing here in the guidance as well. All right, Anirag, come on in on here. Let's talk about AWS. What's doing pretty well, to say the least? Actually, much, much better than what I would have expected. I mean, going from$237 in constant currency is phenomenal just because the size of this business is so large.

3:23I mean, it's so much bigger than Oracle and so much bigger than Google, but it's a very big beat, frankly. And the biggest surprise for me was the margins. I would have expected margins to go down with all these investments that actually went up. So, kudos to the AWS team. And we look to hear more about guidance for next quarter and how much longer can these margins hold up? Anurag, the AI and chips run rate, the Easeclips run rates of over $25 billion, contextualize that for us. As Romain said, a division of a division with$25 billion run rates. Yeah. I mean, to be honest, I don't really care that much about the AI net number.

4:04The number of the chips is the one that I find it more exciting because here is the thing. Like, all these big companies that are spending all this CapEx, a large portion of that CapEx is going to buy GPUs, NVIDIA GPUs. If Amazon can go and figure out their workloads onto their own chips, it saves them massive amount of money and helps them recognize the big backlog that they have without having to give NVIDIA that cash flow. I think that's one of the biggest differentiators between Google, Amazon, and Microsoft is the first to have their own chips that people are embracing at a fast pace. Meanwhile, that's not the case with Microsoft.

4:41Yeah, I think it's just fascinating. As I said, I don't always think about Amazon as a chip company, but you got to remember that they are doing this. And increasingly, these big tech guys are doing it. Poonam, come on back in here. Anything here? I know we're still getting information. There's still stuff we're going to get on the analyst call. Anything, though, that you find is maybe something that's worth digging a little bit deeper into and asking about? I think the advertising business saw a nice pickup, right? 26 % growth rates this quarter is a step up from the close to 20 % that they've been reporting for the past few quarters.

5:12Was that also led by the Prime Day shift, given such a big event moved into the second quarter, did advertising dollars shift too? And will we see that slow down a little in the next quarter? So I'm really looking to better understand how this Prime Day shift affected and helped 2Q across the board and what it really does to 3Q. They've never quantified it, So we're hoping to get some color. How big is Prime Day? Because I know we know from a metrics perspective, but Prime Day kind of started a few years ago as this offshoot of what was it Alibaba doing Singles Day? Is that what sort of inspired it years ago?

5:53That could have inspired it. But, you know, Prime Day was a once a year phenomenon. Yeah. And now it's like a week. It's now twice a year. Right. So it's really just a move to pull shoppers to spend earlier. So if you think about the timing of Prime Day, right, this time they moved it into June, usually in July. So really capturing spend for back to school for these peak holiday moments where consumers are looking to stretch their dollars. They're essentially taking the dollars up front and trying to get the consumers to spend it with them versus elsewhere. Does that happen? Yes and no, because around Prime Day, it's not just Amazon that's striking with deals.

6:31It's also Walmart. It's also Target. It's also Best Buy. Everyone is having their own version of deals around this day. Anything to get us to buy. I know how that works. Hey, just a reminder, everybody, we're talking with Poonam Goyal, Bloomberg Intelligence Senior Analyst for E-Commerce and Atheisure, Anna Raghana, Bloomberg Intelligence Senior Technology Analyst, joining us. If you have a question, let us know. We'd love to bring you into the conversation. For those who are Bloomberg.com subscribers and terminal clients, ask a question of our panelists. Just submit questions for our team to answer live on air.

7:03Bloomberg.com slash ask radio. Send them to Bloomberg.com slash ask radio. And then you can certainly catch their answers live on air with us. Hey, I want to just look at shares of Roblox real quick. The gaming company down about 11 % in the after hours. Just taking a look at what exactly is happening. Second quarter, daily active users came in below estimates, 123 million. The estimate was for 128.7 million users. That was really what missed the average analyst estimate, and that is what has investors concerned. Bookings came in a little shy. Hours engaged came in shy. Revenue did come in higher than expected, though a loss per share at 26 cents.

7:43The estimate was for a loss percent at 34 cents. Loss per share, rather. Shares down 11.5 % in the after hours. All right, so getting hammered. going in the other direction. Shares of Amazon continuing to rally. Our Spencer Soper out with his story. Amazon reported cloud computing revenue that beat analyst estimates with booming demand for artificial intelligence services, accelerating sales for the fifth straight quarter. Revenue jumped 37 % to$42.2 billion at Amazon Web Services, which generates about a fifth of the company's revenue and most of its operating profit. It was the fastest pace of growth since the fourth quarter of 2021.

8:18Analysts on average forecast sales of$40.6 billion, according to data compiled by Bloomberg. You know, Anarag, you have Amazon against the other hyperscalers. What is it that's unique? I mean, you talked a little bit about the chips, and that certainly kind of keeps a lid on some of their costs and their access situation among the chip demands that we've seen out there. But what is the special sauce of Amazon? So, first and foremost, it is the largest public cloud provider. It has a much longer history of working with enterprises. So, remember, when we talk about AI adoption, you think about ChatGPT app.

8:58It's primarily hosted on Microsoft Azure. That's a consumer app. But now you think about AWS and enterprise AI adoption, that's where a lot of large companies around the world would be building their application or they would be infusing AI into their older applications. So that's a big difference is the enterprise presence as well as the, and, you know, for the Microsoft is on the consumer side. Microsoft does both, but for Amazon, that's primarily the bread and butter. The other thing is they're also the key or the preferred cloud provider for Anthropic. And we have seen a massive boost in Anthropic's use for coding agents.

9:34And I think that's also helping AWS in that case. And then if you think, you know, the future of AI is enterprise adoption, you know, Amazon has a lot of data, it has a lot of services. So it's right in the middle of this entire, I would say, AI diffusion within companies. I want to bring in Ed Ludlow to the conversation. He's the host of Bloomberg tech out there in San Francisco. Ed, what sticks out to you? Amazon's numbers up the stock up 8.9 % in the after hours. What sticks out to you? You and Anorag will forgive me because I missed the first part of your conversation. I was on the phone with the CFO, but I mean, this is a beat on every metric where AWS absolutely matters most.

10:16You know, 37 % growth against street expectation of 31%. It's a pretty straightforward set of numbers where they will be peppered with questions on the call for the same magic formula that we discussed in the last few afternoons, capital expenditure, direction of travel, and other points of tangible evidence that the AI from Amazon is gaining traction in its different guises. What did you hear from the CFO? No, as in I spoke to the CFO of a different company. That's why I had to scramble. Which CFO were you talking to? Sorry. I was talking to the, I was talking to the Rivians. Okay. We're going to get to that later.

10:53Okay, great. Uh, but yeah, like I, again, you know, an anorak, like I'm such a massive anorak fan. And so if I say something and he's like, that's dumb, let him say it's dumb. But, um, you know, operating income also like a huge beat. And, you know, if the, the concern of the market for the hyperscalers is that they want to see free cashflow and profit and a commitment to spend and continue top-line growth. They kind of got all of that. There's not a lot left to complain about, is there? Anurag, you want to come in on that? No, I absolutely agree with that. In fact, that's what I was trying to figure out.

11:27Can I find any mistakes over here? But we don't. And in fact, which is why I said, you know, when you think of enterprise adoption and AI, you really cannot think of anybody better than AWS because of given that how much of world applications they house already within their ecosystem. So the big question now is how much they have to spend for the next 12 months to get this kind of rate going. We saw the AWS growth rate jump to 37%. In the next quarter, is it going to be faster than that? Or do we see some moderation in that? So now we are really getting into, to be honest, 50 basis points here or 100 basis points here.

12:06You're nitpicking at this point, frankly. I mean, we're getting some questions from viewers and listeners around the world. Just a reminder, subscribers to Bloomberg.com and terminal subscribers can ask questions. Bloomberg.com slash ask radio. I want to throw this one. This is from Connor in Auckland, New Zealand. Thanks for staying up late, I guess, early in the morning for us, Connor. Microsoft and Amazon are making good progress in enterprise AI. How sticky are their product offerings? Will there be big swings in market share going forward? But Anurag, I think this is a good question for you.

12:39So the way we think about it is the pie is growing at such a fast pace, they will all make money. I'm fairly confident about it. But the question is, what kind of money they will be making? Are they making money renting GPUs and training models? Or are you building AI applications on top of it? We like the second kind of business better because in the long run, it's very difficult to take it off. So let's say go back 20 years or 15 years. if Lyft or Uber started their application on AWS, that's a cloud-native application. As the application is growing, AWS makes more money. If you are developing a brand new AI application today, if you pick one of these three or four cloud platforms, as those apps get bigger, you're going to make money.

13:24So it's a perpetual revenue stream. It's very difficult to take that out and move it somewhere else. But if you're only training models, that's a very different revenue stream. Yeah, it's interesting, too, because I was just looking at Spencer Soper, the story that he's got on the Bloomberg Terminal, Bloomberg Spencer Soper. He says the company lacks a hit consumer AI product on par with OpenAI's ChatGPT and Anthropics Cloud, but has Inc. deals committing both AI Labs to spend at least$100 billion in services from the Amazon Web Services Cloud unit in the coming years. I mean, Anarag, that's a big deal.

13:56Yeah. So one of the things Microsoft said yesterday was the sequential increase in commercial real performance obligations or the backlog that they had. I think it was about 45 billion. All of that was from non-frontier model companies, which is that is not Anthropic, that is not OpenAI. Because remember, what is the biggest fear right now in the market is what if OpenAI is not able to take care of the commitments or Anthropic and so forth? But what they're saying is the business now they're coming in, in their backlog or in their bookings, is from non-frontier models. And that's really, I think, one of the most important questions that we want to ask the company today is, if they talk about cloud commitments, where are those cloud commitments coming in?

14:37Is it the three or four companies or is it more diversified? Right, exactly, in terms of exposure to maybe just a few big customers. Poonama, I want to bring you back. We talk so much about AWS, and I know we do that with you as well. It's so important in terms of what really makes money for Amazon. But you think about, I mean, they sell a lot of stuff. So many of us relate to Amazon as a retailer. How do they think about increasingly using AI to kind of juice the numbers and maybe improve the profitability on the retail side of things? Yeah, AI has been a big push on the retail side. And actually, I think Amazon does it best, better than anyone.

15:12When they introduced Alexa for shopping, for example, Alexa Plus, it's pretty clever. You know, you go to the search bar, you can compare pricing. You can say, I'm looking for this item. And when was it priced cheapest? And if it drops to that price, buy it for me. I mean, just that simple and it'll show up at your door. So I do think that they're gaining traction there. In fact, in the release, I believe they said that interactions and active users doubled over second quarter just with AI adoption and Alexa for shopping. So they're making momentum here. we do think that the investments that they make in Alexa for shopping and AI will continue to not only help them with customer service and conversion online, but also improve margins on the retail side, which are slim to none, as you know.

16:00I find that data so amazing. Poonam, I didn't know you were with us. It's so good to see you. By the way, every morning when I wake up for Bloomberg Surveillance, it's because my Echo device works. I ask Alexa to set an alarm and it's very reliable for that. But for ages, I've been thinking, what am I going to use this for? The data you're pointing to is amazing, though. Alexa for shopping, right? If there are shoppers on Prime who use Alexa, more than 40 % more per order if they involve the AI in the transaction. I find that amazing. But it doesn't move the needle on the financials, right, for Amazon at this stage?

16:31It doesn't move the needle because you have to think about how big Amazon is, right? We're approaching a trillion dollars in GMV this year based on our estimates. So that's a sizable number. So when we see these growth rates with the online business up 15%, it's a big number to move. That said, I do think it does move the needle on conversion. I do think the Alexa for shopping is helping its prime customers, more notably, really engage and purchase things even quicker. Because now you're just talking to someone. You're talking to this agent and you're setting expectations on what you want and things will just show up to your door.

17:09So now you don't need to go back and keep going back to say, OK, did the price drop? Is this the best price? Is this what I need? Do I need something else? It's doing the work for you. So I do think over time that will help boost sales and really help Amazon continue to maintain its lead in the online world. I want to throw one to Ed and back to the technology side of things. And I want to talk a little bit about the company's chips business. We got some data about annual revenue run rates. Anurag said he's not as interested in the AI side of it. He's more interested in the chips side of it. Me too.

17:44You know, they've got the, what is it, the Tranium? Is that what they're talking about here? Well, it's multifaceted, but the chips business has revenue run rate$25 billion, as does the AI business. It's a run rate figure. But it is amazing how quickly they've kind of turned it around from the in-house R &D to like, they got a lot of questions from what's the point of Tranium? Like who's using it? they had a lot of early success with saying Anthropic will use Tranium but Anthropic quickly followed up with some big TPU deals $25 billion, you know, for context AMD did$35 billion of revenue all told in its last fiscal year and it's likely to do$50 billion this year but it shows they're moving pretty quickly on it you know, across those it's not them literally a bag of chips here you go, you know, it's still them renting capacity specifically to their own silicon but to third-party customers.

18:38And like, you know, if Google gets all the credit for TPU, then should Amazon get some credit for those Tranium chips too? Some would say yes. We were talking about, Anirag, come on back. We were talking about chips with you and Amazon earlier. Yeah, I think that's exactly what, you know, Ed is talking about here because remember, it's the CapEx side of it also that's important. First of all, if customers are embracing Tranium along with Amazon Cloud, I mean, it's really good for them because guess what? They get to keep a lot of that gross margin that they don't have to pay NVIDIA for those chips.

19:12So I think sooner or later, the big game in this case is going to be who has the lowest cost per token within all the hyper-scale cloud providers, and that's where Google and Amazon may have a leg over Microsoft.

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