Amazon Stock Drops 7% Amid AI Spending Worries, Cloud Growth Impacted
Amazon shares fell sharply in after-hours trading on Thursday as heavy investments in artificial intelligence and a weaker-than-expected earnings report overshadowed strong growth in its cloud computing division. The company’s stock dropped as much as 7% following the release of its third-quarter results, which missed Wall Street expectations. During regular trading, shares had already declined by 4.3%, closing at $243.79.
Amazon Web Services (AWS) reported a significant revenue increase of 39% year-on-year, reaching $46 billion for the quarter ending September 30. This growth represents the fastest rate in nearly five years, surpassing analysts’ expectations of $45.61 billion. However, concerns about the costs associated with expanding AI capabilities weighed heavily on investor sentiment.
Cash burn and outlook weigh on sentiment
Amazon’s aggressive spending plans have raised questions about the pace at which its AI investments will translate into cash generation. The company reported a trailing 12-month cash burn of $42.4 billion for the September quarter, driven by substantial capital expenditures. Spending on capital projects during the quarter reached $77.26 billion, approximately $20 billion above estimates.
Despite generating significant cash from operations, Amazon’s capital expenditures have overshadowed these gains. The company reported net sales of $201.94 billion for the quarter, a 12% increase from $180.17 billion a year earlier. However, net income fell to $20.69 billion, or $1.89 per share, down from $21.19 billion, or $1.95 per share, in the same period last year. Analysts had anticipated earnings of $1.97 per share on revenue of $202.2 billion.
Advertising business misses expectations
Amazon’s advertising segment also fell short of expectations, with revenue rising 12% to $19.6 billion, missing the anticipated growth of 18%. This marked the first time in seven quarters that the advertising business did not meet estimates. The slowdown contrasts sharply with the previous quarter’s growth of 26%.
CEO Andy Jassy attributed some of the weakness to the timing of the Prime Day shopping event, which occurred in the second quarter this year. The shift in timing also impacted overall third-quarter sales growth, with Amazon stating that year-on-year revenue growth would have been approximately four percentage points higher without the calendar change.
AI spending pressures spread across Big Tech
Amazon’s results come amid increasing scrutiny of the substantial investments technology companies are making in AI infrastructure. Alphabet, Google’s parent company, saw its shares drop 12% following its latest results and rising expenditures. Microsoft has also adjusted its capital expenditure outlook downward.
The sell-off reflects investor concerns about the financial strain that building data centers and deploying AI technology could impose on even the largest tech firms. Amazon is under scrutiny regarding the impact of its expanding data center operations on local communities. Earlier this month, the company announced plans to invest over $1 billion in community initiatives related to education, job training, and energy conservation.
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