Where Amazon Stands As AI Battle Heats Up --- Record results should the help the e-commerce titan.

"Amazon might not yet be the clear winner in the race among tech giants over artificial intelligence. But it isn't losing ground yet either.

The e-commerce titan's third-quarter results late Thursday seemed to paint a mixed picture on that front. Total revenue of $143.1 billion was up 13% from the same period last year, which exceeded the 11% growth Wall Street was expecting. And operating income soared, hitting a record $11.2 billion compared with $2.5 billion in last year's third quarter -- exceeding analysts' consensus target by nearly half. That was helped by sharp growth in advertising and third-party seller services -- both of which offer superior profit margins compared with Amazon's more typical retail sales.

But AI is now the dominant theme across the tech industry, which made the results for Amazon's AWS cloud-computing business even more closely watched than normal. Revenue there of $23.1 billion was about 1% short of Wall Street's targets, and the growth rate of 12% year over year was flat with what AWS logged in the second quarter. That suggested the company is still seeing many of its customers undertake what it calls "cost optimizations" to reduce their spending. And that contrasted poorly with results two days earlier from Microsoft -- Amazon's biggest competitor in the cloud -- which reported that its Azure service accelerated its pace of revenue growth by 3 percentage points during the same quarter.

Microsoft has been the most aggressive early mover on generative AI, announcing plans early this year to adopt the technology across its suite of business software tools as well as internet search. So a lack of clear AWS revenue momentum in the quarter initially worried investors, causing Amazon's stock price to slip following the results.

But AWS also saw a strong jump in operating income following three consecutive quarters of declines. And during a later conference call, Chief Executive Officer Andy Jassy said the pace of new deal signings in AWS is now picking up -- with customers shifting more cloud workloads to processes that use Amazon's own in-house chips that run at a lower cost. Amazon's share price jumped more than 5% in after-hours trading following the call.

Much remains to be seen about how Amazon will fare in AI. The company is the undisputed leader in cloud computing; AWS now generates nearly $89 billion in annual revenue, which would rank the division 40th on the S&P 500 as a stand-alone company. But Amazon also has a much less lucrative core business than Microsoft and Google to help underwrite the expensive technology. Those two rivals currently generate annual free cash flow in the $63 billion to $78 billion range, compared with about $21 billion for Amazon.

Hence, Amazon is getting creative. The company has a growing line of in-house chips to power its cloud services, including processors designed for AI training and workloads that compete with Nvidia's. A deal announced last month with Anthropic, an AI startup competing with ChatGPT creator OpenAI, should raise the profile of Amazon's AI chips as Anthropic uses them to train and deploy its AI model.

"They have better price-performance characteristics than the other options out there, but there's also the fact that you can get access to them," Jassy said of Amazon's chips during Thursday's call -- subtly referring to the rather limited supply of Nvidia's top-of-the-line AI processors. The company that once made its employees work on desks made of converted doors knows something about finding interesting ways to save a buck." [1]

1. EXCHANGE --- Heard on the Street: Where Amazon Stands As AI Battle Heats Up --- Record results should the help the e-commerce titan. Gallagher, Dan.  Wall Street Journal, Eastern edition; New York, N.Y.. 28 Oct 2023: B.12.