Amazon Surprises With Largest Earnings Beat Since Q4 2020

AWS Shines With 12% Growth in Q2 Sales, Reinforcing Dominance Leadership in Cloud Market

Amazon reported its largest earnings beat since Q4 2020 earlier this week, a positive signal that CEO Andy Jassy’s cost-cutting measures and cloud growth focus are finally paying off. Amidst the largest layoffs in company history and a freeze on corporate hiring, Jassy has made some crucial adjustments to the company’s financial strategy.

According to Amazon’s earnings report, the firm’s global headcount decreased by 4% year-over-year, bringing the total number of employees down to 1.46 million, which is still a huge number by any measure. Despite this dip in workforce numbers, the e-commerce titan forecast Q3 sales landing between $138 billion and $143 billion, translating to a robust growth rate of 9% to 13% if the company pulls it off. This guidance aligns with analysts’ expectations and comes hot on the heels of the success of Amazon’s “biggest ever” 48-hour Prime Day event held in July. The earnings numbers signal a return to double-digit expansion after a stretch of single-digit growth for five out of the past six quarters.

One aspect that stands out from this earnings cycle has been how Amazon and other tech giants like Apple and Microsoft expertly manage the market’s expectations. Their ability to consistently exceed predictions results in a cascade of positive outcomes. This skill has been vital as many market commentators had predicted that Amazon would post less- than- stellar numbers heading into this quarter, particularly for its Amazon Web Services (AWS) division, which was anticipated to experience a sharp decline from 30% to 10% growth. Yet, AWS’s sales did not falter as feared, offering a sigh of relief for its growth prospects.

The financial results have clearly exceeded expectations, and this is with AWS being more conservative than many tech vendors when it comes to leaning into the market hype around AI, despite the company having much to shout about in that area.

AWS Is the Star of the Show

Many in Washington see big tech as being a problem, largely due to what can only be explained as equating big with equal bad. While AWS is a market leader in public cloud, it faces strong competition from global and regional players. AWS is under intense pressure from Microsoft and Google ,and we are also seeing players such as Oracle and IBM gaining traction, suggesting that the market for public cloud is one of healthy competition with no single player having a monopoly position.

The potential split of AWS from Amazon has sparked a divisive discussion in the market, with Jassy unsurprisingly not being a fan. Some investors see it as a positive move, allowing AWS to focus on its core business and respond more agilely to market changes. Personally, I fear that it could weaken Amazon’s competitive position, as AWS plays a vital role in the company’s financial structure, accounting for 70% of profit in the recent earnings announcements. Lina Khahn, chair of the Federal Trade Commission (FTC), needs to focus elsewhere and look at issues such as bundling and app marketplaces before she considers splitting AWS from Amazon.

Andy Jassy, the still relatively new CEO of Amazon, who previously led the AWS business, attributes a significant portion of the company’’s financial upswing to its cloud arm and rightly so. Amid the backdrop of economic uncertainty, AWS has been grappling with a deceleration in client spending. However, a change in customer behavior, shifting from cost optimization to new workload deployment, has brought about stabilization, according to Jassy.

AWS witnessed a 12% rise in its Q2 sales, reaching $22.1 billion and surpassing Wall Street’s projections of $21.8 billion. This underscores that AWS remains the number one provider of public cloud services.

Four- Horse Race? Google, Microsoft, and Oracle

Both Microsoft and Google, two tech giants in the hyper scale cloud space, have also recently reported their respective Q2 earnings results, demonstrating their resilience and impressive growth in the ever-evolving digital and macroeconomic landscape. Microsoft, with its 48-year track record, achieved its highest-ever earning results, largely driven by the transformative power of artificial intelligence (AI) across its portfolio. In contrast, Google outperformed expectations, buoyed by robust advertising revenue from its Google search business and YouTube platform.

During the same week as these earnings announcements, I had the privilege of participating in the Trade Talks show with Jill Malandrino and appearing on the TD Ameritrade Network, where we delved into the growth strategies of Microsoft and Google’s cloud businesses.

Microsoft’s fiscal Q4 earnings demonstrated impressive profits and revenues that exceeded Wall Street’s estimates. With earnings of $2.69 per share, representing a 21% increase, and revenue amounting to $56.19 billion, the company showcased robust performance across several key metrics. The standout factor behind Microsoft’s success was the profound impact of AI across its cloud computing and AI-driven solutions. By integrating AI into its cloud offerings, Microsoft experienced significant growth in its Azure cloud platform, recording an impressive 28% increase.

AI-driven insights provided by Microsoft’s solutions have empowered customers to make data-driven decisions, optimizing processes for greater efficiency and improving the overall user experience. Notably, Microsoft’s AI-driven applications, including the widely-acclaimed Copilot, have resonated with consumers, enhancing productivity and creativity.

On the other hand, Alphabet, the parent company of Google, reported impressive Q2 earnings, propelled by robust advertising revenue from its Google search business and YouTube platform. With a consensus estimate beating earnings per share (EPS) of $1.44, and a revenue increase of 7% to $74.6 billion, Alphabet showcased its ability to adapt and thrive amidst economic challenges.

One of the key contributors to Alphabet’s growth was its Google Cloud business, which reported a record operating income of $395 million, compared to an operating loss of $590 million in the same quarter last year. Google Cloud Platform, although historically lagging behind competitors like AWS and Azure in terms of market adoption, is now showing signs of potential change.

Google CEO Sundar Pichai highlighted that over 70% of generative AI startups depend on Google’s cloud infrastructure and AI capabilities, showcasing strong interest in next-gen technology among emerging companies aiming to develop novel services. This growing trend of AI adoption and partnerships with AI-driven startups have had a positive impact on Google Cloud’s Q2 revenue, soaring 28% to an impressive $8 billion.

Oracle should also not be overlooked, with its Oracle Cloud Infrastructure business posting impressive growth figures for the last few quarters, admittedly from a smaller base. During the recent Q4 earnings Oracle CEO, Safra Catz, announced that the company achieved a record-breaking revenue of $50 billion in FY23. The remarkable growth was primarily driven by the cloud applications and infrastructure divisions, which experienced a combined growth rate of 50% in constant currency. Notably, the infrastructure business exhibited accelerated growth with a remarkable 63% for the full year and an impressive 77% in the fourth quarter. With both strategic cloud businesses expanding and growing at a faster pace, Catz expressed optimism for another strong year in FY24.

Both Microsoft and Google are actively utilizing AI to transform their cloud offerings, and their commitment to innovation and transformative technology sets them on a path to remain competitive and resilient in the dynamic digital landscape. Oracle is doubling down on its database franchise and apps business and providing strong connectivity with its cloud@customer line of tethered hybrid solutions. As the market continues to evolve, the strategic application of AI will undoubtedly play a pivotal role in shaping the future of the hyper-scale cloud space, and AWS, Microsoft, Google and Oracle are undoubtedly leading the way with their visionary AI-driven strategies.

Looking Ahead

Amazon’s Q2 2023 earnings call shed light on the remarkable growth of the company’s cloud unit and strong performance for the retail side of the business. The company’s adept management of market expectations, coupled with the continued growth of AWS, has cemented Amazon’s position in highly competitive markets. Despite a slight 4% YoY reduction in global headcount, the success of their the company’s record-breaking 48-hour Prime Day event shows that customers still see Amazon as a key destination for their retail needs.

Looking ahead, AWS’s dominance leadership in the cloud discussion and its growth potential in industries with lower cloud adoption rates make me bullish on its prospects. Furthermore, the strides AWS is making in AI, that which are no’t substantially factored into this earnings cycle, suggest an even brighter outlook. AWS’s AI and ML solutions, known for their high accuracy, scalability, cost-effectiveness, and user-friendliness, are already transforming industries. As these services gain traction, we can only foresee further upside to Amazon’s topline revenue.