DI25011 Amazon Investing Capital V01 181125
Cloud’s a silver lining for big spender
AMAZON
Market cap $2.5 trillion
Q3 revenue $180 billion
Like its Magnificent Seven peers, Amazon has been testing the faith of investors, swept along by the artificial intelligence boom.Thirdquarter results last month brought small vindication for optimistic shareholders. Revenue for its cloud computing arm rose at its fastest pace in about three years, gaining 20 per cent over the September quarter to $33 billion. Operating profit for Amazon Web Services was 10 per cent higher at $11.4 billion, or about two thirds of the group total.
Amazon’s high-margin cloud computing arm has long been considered the jewel in the crown.
Wall Street remains bullish on the company’s prospects. The consensus earnings forecast for next year has been steadily revised upwards, almost a fifth higher than it was two years ago. Like other tech companies it has increased investments in the technology and is spending billions to expand data centres that support AI and cloud computing, as well as developing its own Trainium AI chips and purchasing more from other providers including Broadcom, Nvidia and AMD. The group is reportedly looking to raise $12 billion via a corporate bond sale, its first such deal in US dollars since 2022.
Capital expenditure this year is set to come in at $125 billion, Andy Jassy, its chief executive, told investors in October, higher than the $100 billion that it had guided towards at the start of its financial year. So far this year, it has spent $89.9 billion.
Amazon is not alone in its frenetic spending. Capital expenditure for the eleven largest global hyperscalers is now on track to reach $469 billion, according to estimates from Morgan Stanley, the American investment bank, which would represent an annual increase of 68 per cent.
However, Amazon is among the biggest drivers of the collective stepup in spending, according to the bank’s analysis. What’s more, capital intensity — capital expenditure as a proportion of revenue — is set to rise to almost 18 per cent this year, up from 13 per cent last year. Put another way, capital expenditure has risen at a compound annual rate of 29 per cent over the past three years, while group revenue has gained an average 12 per cent.
Whether that heavy spending is justified is hugely dependent on whether the demand for extra computing power to fuel AI materialises at the rate that Amazon, and its tech rivals, hopes for.
Amazon has said it has doubled its cloud computing capacity since 2022, and expects to double it again by 2027. Goldman Sachs analysts have pointed towards a 60 per cent increase in AWS revenue alone between 2022 and this year, higher than its current forecast for the business’s revenue to rise by about 45 per cent between this year and 2027. However, there may already be some doubt creeping into the minds of investors. True, the shares trade close to a record high of almost $233 apiece, which translates to a multiple of 30 times forecast earnings, frothy by conventional standards. But against the stock’s own history, it is close to the lowest in 15 years and only slightly higher than in April, when American stocks sold off heavily in the aftermath of President Trump’s sweeping global tariffs.
Amazon is confident that it will end the year strong. The group, which was founded in 1994 by Jeff Bezos, who remains executive chairman and is the largest individual shareholder, has forecast overall net sales of $206-213 billion for the peak fourth quarter, which at the midpoint is above a consensus forecast of $208 billion from Wall Street analysts, and an 11 per cent increase on a year earlier.
The threat of tariffs cast a pall over its ecommerce division, raising costs for some third-party sellers. In May Jassy told investors of “some heightened buying” as consumers pulled forward purchases, but it had not yet seen a big increase in average selling prices. However, in the third quarter net sales for its North American ecommerce business rose 11 per cent, an acceleration on the same time last year.
There is the chance that cost savings could provide a sustained boost to margins for its ecommerce business, if sales volumes hold up, analysts at Goldman Sachs point out.
Last month it announced 14,000 job cuts. However, after a strong run, catalysts to stoke a further rise in the shares could be harder to come by.
ADVICE Hold
WHY Future growth look accounted for in valuation
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