The Six Five team discusses Amazon and AWS’ latest earnings.
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Transcript:
Patrick Moorhead: Amazon and AWS. We like to separate them because businesses are just so different.
Daniel Newman: Well, I think the way it kind of works is Amazon ships massive amounts of revenue then AWS makes all the profit. I think that’s pretty much how this business has been designed, and that’s always been part of the reason that it’ll probably be a challenge for the business to ever get split up when they’ve been in conversations about the possibilities of that happening is there’s so much interdependence between the two. But the first response is better than expected.
Look, Amazon’s had a couple of really tough quarters and a lot of it had to do with this. They made a massive investment in Rivian a few years back and the Rivian stock is down like 90%, and they’ve had to take these huge mark-to-market write downs of the value of that stock. And while Amazon obviously did make some big investments, not only in Rivian but also in electrification, and I think that was part of the whole narrative, that’s an interesting issue for a company to run into is when a big public company makes an investment in another public company and then they have to actually suffer through the other company’s performance on their own earnings report. It’s not a real common thing to have happen with – it’s such a large magnitude that’s taking you from significant earnings to significant losses.
I think a lot of the street thought revenues were going to be soft and this has a lot more to do with that kind of macro environment. People thought that consumer was down. This looming recession that everybody keeps talking about, I still think it’s out there, Pat. Between you and me, there’s still just a lot of reasons between the high interest rates, there’s kind of rocky banking situation, there’s a lot of cautiousness across the board. But having said that, some of the numbers that came in this quarter just don’t reflect that. It seems like maybe it’s the habits of the pandemic, maybe it’s the fact that Amazon is getting more wallet share and people are just using their services. I don’t know about you, but I feel like I order something from Amazon every day.
I literally can’t think of the last day something hasn’t been dropped on my porch from Amazon. So that’s a good thing for the company. Now, after they announced they had a really strong response, everybody was really excited. Now, when their CFO came on and talked, they did mention a little bit of cautiousness about the AWS growth and I’ll let you dig into that more momentarily, but that kind of killed the buzz. It totally killed the buzz because what we talked about in the beginning, it’s so important to the company’s profitability. On a more positive note, one of the things you and I have talked about over the last few quarters is Amazon as an advertiser hasn’t been discussed a lot, but this quarter Amazon did almost $10 billion in advertising. And that was a lovely expectation there, which it’s been something that we’ve been watching because advertising is both a diversification and another significant profit center.
And as Amazon becomes more of its own ecosystem, the advertising becomes a real growth opportunity for the company. You look at some of the developments. They announce Bedrock this corner, which is going to be Amazon large language model, that’s going to be their ChatGPT. And one of the things, if you look at something like how will AI now affect the searchability and product? Well, Amazon has this really interesting connected ecosystem between its devices, ambient technology and between the commerce. Pretty soon in the home, I can see – because they’ve been doing the conversational AI thing for a while. I mean they’ve had all these devices, all these echos and systems to be training for a long time. So their play in AI is going to be really interesting. And the tie in between AI advertising and the smart home or the intelligent connected home is going to play an interesting role for its long-term growth as it’s going to make shopping even easier and it’s going to make the ability for Amazon to know and predict what people need even more proactive.
So you can see that as another area of the company. So like I said, I’m going to kick over to you to talk about AWS, but the last thing I’ll say is Amazon’s been pretty aggressive with cutting costs. And so part of its path to profitability has been cutting costs. And I think I pointed out in a way where I’m sensitive to companies reducing because there’s a very human, difficult human element to this. But as you’ve seen, whether it’s been Meta, whether it’s been Amazon, the street is looking for companies to trim the fat right now. Companies hire too much. And if you look at from 2020 before the pandemic to now, even with the cuts they’re making, they’re still way bigger. Way more people are working at the companies and I think they hired too fast, too aggressively and we’re starting to see that chip’s getting righted. And while it’s hard to say, I think that that has been part of the recent run-up.
Pat Moorhead: Good stuff, Dan, thanks for leaving me a little bit of oxygen, but with a company like Amazon, there’s a lot of, lot of growing out there. So the AWS revenue growth number wasn’t anything to swing you around the room. It was 15.7%, but I’ll balance that out to it’s honing in on $100 billion in revenue. That’s just absolutely amazing. There was a lot of talk about customers optimizing spend, as you said. Amazon CEO Andy Jassy was really clear that this is cost optimizing versus cost-cutting and they’re taking a long term view, helping customers optimize their spend that he said in the short term could drive declines, but this is a 10-year bet. And the way that he talked about this was reiterating what he talked about on one of his infamous CNBC interviews that there’s 90% of global IT spend is still on-prem, as a-
Daniel Newman: That was a great interview.
Pat Moorhead: I know. It really had ripples too, out there.
Daniel Newman: Yeah, I enjoyed that.
Pat Moorhead: And the other big observation that I had from the call was really leaning in on its own chips for AI, and let me read the quote here. He said, “I think there’s a lot of chips out there, particularly GPUs which are optimized for this type of workload. They’re expensive and they’re scarce and it’s hard to find enough capacity.” And then he went in and talked about Trainium. He talked about, hey, we’re on our second generation of inference chips with Inferentia, and then he went through his whole generative AI play with Bedrock and including his own Titan model.
So I thought it was a good way to play that, because how are you going to play that? You have maybe three options, and I think he just leaned right into that. And that is classic Amazon, which I think investors appreciate. I mean, if you remember how long the company never made any money and they just kept growing and growing and growing. I think they’ve demonstrated that once they get to a certain place they can make money in nearly every market that they get into. They did cut a few retail lines, which, to me, makes sense. It was funny to rattle them off. I had never actually heard of any of them. Like Amazon Fabric, I have no idea what that is. It’s fabric store, I guess. I must not be in the demographic. But all in all I think pretty good, pretty good showing. So Daniel, any final words there?
Daniel Newman: No, no. I guess I would just say if you really want to get a good perspective on the Amazon opportunity, I thought that CNBC exclusive and the interview with Andy and then that whole shareholder letter really gave me some perspective because I’d been kind of wondering if we’d hit the wall. Andy has not necessarily been the same as Jeff in terms of how the world sees Amazon, and I think that was a really good moment for him. So I’d say to people, that’s worth checking out if you’re kind of looking to the future of Amazon.
Author Information
Daniel is the CEO of The Futurum Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise.
From the leading edge of AI to global technology policy, Daniel makes the connections between business, people and tech that are required for companies to benefit most from their technology investments. Daniel is a top 5 globally ranked industry analyst and his ideas are regularly cited or shared in television appearances by CNBC, Bloomberg, Wall Street Journal and hundreds of other sites around the world.
A 7x Best-Selling Author including his most recent book “Human/Machine.” Daniel is also a Forbes and MarketWatch (Dow Jones) contributor.
An MBA and Former Graduate Adjunct Faculty, Daniel is an Austin Texas transplant after 40 years in Chicago. His speaking takes him around the world each year as he shares his vision of the role technology will play in our future.
