Amazon stock forfeits gains after company warns on ‘optimizations’ from AWS customers

Amazon (AMZN) reported first quarter earnings on Thursday that beat expectations and initially sent shares surging, but cautious comments regarding a slowdown in its key Amazon Web Services (AWS) cloud unit saw the stock reverse all of these gains in extended trading.

Amazon CFO Brian Olsavsky told investors on the company’s earnings call AWS customers are continuing “optimizations” in their spending and guided to a notable slowdown in growth from the segment, spooking investors.

Amazon shares were down about 2% near 8:00 p.m. ET Thursday evening.

“As expected, customers continue to evaluate ways to optimize their cloud spending in response to these tough economic conditions in the first quarter,” Amazon CFO Brian Olsavsky told analysts on the company’s earnings call. “We are seeing these optimizations continue into the second quarter with April revenue growth rates about 500 basis points lower than what we saw in Q1.”

Revenue in Amazon’s AWS unit grew 16% during the first quarter, down from an annual growth rate of 37% seen in the same quarter last year.

Olsavsky sought to cushion the blow of this guidance by telling investors, “we’re not trying to optimize for any one quarter or year. We’re working to build customer relationships and a business that will outlast all of us.”

Amazon stock popped as much as 10% late Thursday as investors digested revenues, profits, margins, and current quarter guidance that all blew past Wall Street’s expectations.

Here are the headline numbers from Amazon’s report, compared to analysts’ estimates compiled by Bloomberg:

  • Net sales: $127.36 actual versus $124.7 billion estimated

  • EPS: 31 cents actual versus 20 cents estimated

  • Amazon Web Services (AWS) net sales: $21.35 billion actual versus $21.03 billion estimated

  • Operating margin: 3.7% actual versus 2.38% estimated

  • Q2 net sales guidance: $127 billion – $133 billion actual versus $130.1 billion estimated

“There’s a lot to like about how our teams are delivering for customers, particularly amidst an uncertain economy,” Amazon CEO Andy Jassy said in the earnings statement.

The company’s efforts to rein in costs, which ran Amazon about $500 million in the first quarter, are expected to be a central focus on the company’s earnings call Thursday evening. The company announced plans to lay off a total of 27,000 employees over the last few months.

“Our Stores business is continuing to improve the cost to serve in our fulfillment network while increasing the speed with which we get products into the hands of customers (we expect to have our fastest Prime delivery speeds ever in 2023),” Jassy said.

“Our Advertising business continues to deliver robust growth, largely due to our ongoing machine learning investments that help customers see relevant information when they engage with us, which in turn delivers unusually strong results for brands.”

On the company’s earnings call, both Jassy and Olsavsky also spoke about the still-wary customer, both on the e-commerce and AWS sides of the business.

“We saw moderated spending on discretionary categories as well as shifts to lower-priced items and healthy demand in everyday essentials, such as consumables and beauty,” said Olsavsky.

This in some ways mirrors what Amazon is seeing among cloud customers, Jassy added.

“In AWS, what we’re seeing is enterprises continuing to be cautious in their spending in this uncertain time,” he told analysts. “Customers are looking for ways to save money however they can right now. They tell us that most of it is cost-optimizing versus cost-cutting, which is an interesting distinction because they say they’re cost optimizing to reallocate those resources on new customer experiences.”

AWS CEO Andy Jassy, discusses a new initiative with the NFL that will transform player health and safety using cloud computing during AWS re:Invent 2019 on Thursday, Dec. 5, 2019 in Las Vegas. (Isaac Brekken/AP Images for NFL)

Much of the initial excitement around Amazon’s quarter, however, can be seen in the growth that returned to some parts of the business.

In its North America retail operations, for instance, the company’s gone back to making money. This time last year, the segment was operating at a loss of more than $1.5 billion in the three months leading up to March 31, 2022. This year, this segment reported operating income of $898 million.

Another case in point: Last year, in Q1 2022, online stores sales declined 1% year-over-year. In the first quarter of this year, sales rose 3%.

Allie Garfinkle is a Senior Tech Reporter at Yahoo Finance. Follow her on Twitter at @agarfinks and on LinkedIn.

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