AWS still soars as Amazon's retail arm is hit by sector slowdown, but it's another quarter of big losses overall

Stuart Lauchlan Profile picture for user slauchlan July 29, 2022 Audio mode
Summary:
AWS growth far outstrips the overall Amazon rate.

retail

Amazon’s retail arm took an entirely predictable hit, contributing to a $2 billion loss for Q2 - the second consecutive quarterly loss - but AWS continues to soar, up 33% year-on-year to $19.74 in revenues.

That growth rate for the cloud business far exceeds an overall year-on-year rate of seven percent overall to bring the total for the quarter to $121 billion.

In the official earnings release, Amazon argued that AWS “continues to be the most broadly adopted set of cloud infrastructure services", citing new customers including Delta Air Lines, Riot Games BT, investment banking firm Jefferies, health and wellness organization Geisinger, Swedish manufacturing firm SKF, Italian multinational energy company Eni and Australia’s Electric Mine Consortium.

CFO Brian Olsavsky picked up the theme in the post-earnings analyst call as he said :

We saw another strong quarter of innovation and customer engagement in AWS, where net sales were $19.7 billion in Q2, up 33% year-over-year, and now represented an annualized sales run rate of nearly $79 billion. AWS continues to grow at a fast pace, and we believe we are still in the early stages of enterprise and public sector adoption of the cloud.

We see great opportunity to continue to make investments on behalf of AWS customers. We continue to invest thoughtfully in new infrastructure to meet capacity needs, while expanding AWS to new regions, developing new services and iterating quickly to enhance existing services.

Spend 

That means spending more on that infrastructure growth, he confirmed:

In 2021, we incurred approximately $60 billion in capital investments. About 40% of that is comprised of technology infrastructure, primarily supporting AWS as well as our worldwide stores business. Another 30% of the $60 billion was fulfillment capacity and a little less than 25% was for transportation, remaining 5% was comprised of things like corporate space and physical stores.

For full-year 2022, we do expect to spend slightly more on capital investments than last year, but the proportion of capital spending shifts among our businesses. We expect technology infrastructure spend to grow year-over-year, primarily to support the rapid growth in innovation we are seeing with AWS. We expect infrastructure to represent a bit more than half of our total capital investments in 2022.

The current macro-economic climate isn’t going to help here, he added:

Our macro-economic issues are principally on inflation and pretty transparent on that. I think the new thing this quarter is additional pressure on the energy, electricity rates in our data centers because of the ramp up in natural gas prices, if you've seen that. So that's probably the new information and then the other inflationary factors. Well, some of them are coming down slightly, [but] they’re still significantly a penalty year-over-year.

Other cost pressures are principally on our cost of employees. If you look at our stock-based comp as a percent of revenue, it's gone up 150 basis points quarter-over-quarter, as we stepped up from Q1 to Q2. We see that pattern every year, but we don't see that magnitude and that's where a lot of our wage inflation is for particularly our technical employees. So there's a certain amount of conservatism always built into this because we are in a very difficult macro-economic state potentially.

But overall, the message around AWS is one of continued investment to fuel growth. Olsavsky said:

[On] pricing issues as we extend contracts, we've seen really good progress with our customer base, longer and longer commitments, really committing to the cloud. Some of that comes with credits to help them make their conversion to the cloud….We're very happy with the growth rate. We're happy with the adoption of the cloud as you hit a potential rough patch in the economy.  I think the last time we saw this was back in 2008-ish. It’s hard to draw lessons from that, but we did notice that it did help our cloud business at the time, because again, when you're trying to launch a new product or service and you are faced with building your own data center and getting capital for a data center and building it yourself or moving to the cloud and essentially buying incremental infrastructure capacity, then cloud computing really shows its value.

So just like when the slowdown came in 2020, we are prepared to help customers optimize their costs and will help any who are scaling down. But we'll also, again, continue to find new customers and new industries, including government agencies, and we’re happy with that. And if you look again, where our investments been over the last few years and the growth of our sales force and our sales support, it is showing benefits, and we expect that to continue. 

My take

It may have turned in a big loss, but Wall Street sent the Amazon share price up 12%  in after-hours trading. There’s clearly a lot of confidence around the organization and its ability to ride out the current macro-economic turbulence better than many of its rivals. That’s a confidence that’s undoubtedly well-placed. The slowdown in retail purchases can be seen reflected across the entire sector, fuelled by the re-opening of physical stores and the looming recessionary pressures on discretionary spend. This too will pass. Onwards!

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