AWS warns of demand slowdown as customers seek to cut spend

Amazon shares pummelled, but cloud operation thinks Graviton CPUs can save the day

Amazon has joined other major tech players in offering a gloomy view of its financial future, earning itself a massive share price cut – and even its booming cloud business is not immune.

The e-tail giant today posted Q3 2022 revenue of $127.1 billion – a 15 percent year on year increase. Net income of $2.9 billion was $300 million down on last year, but a return to profit after two quarters of red ink.

Guidance for Q4 was for revenue growth in a band between two and eight percent, which investors saw as a sign that the holiday shopping season will be a stinker. Amazon's share price therefore became a sinker: after opening at $115.66 the company's scrip dived to $88.10 before ending the day at $94.94.

AWS energy bills are 'materially higher … up more than 2x over the last couple of years'

Amazon Web Services brought $20.54 billion through the door in the quarter, up from the $16.1 billion it earned in Q3 2021. The cloud colossus's annual revenue rate is now over $82 billion – placing AWS neck and neck with Sony in terms of the highest earning tech companies.

But CFO and senior veep Brian Olsavsksy revealed AWS has also seen signs of a slowdown.

"Although we had a 28 percent growth rate for the quarter for AWS, the back end of the quarter, we were more in the mid-20 percent growth rate," he said. "So we've carried that forecast through to the fourth quarter."

"With the ongoing macroeconomic uncertainties, we've seen an uptick in AWS customers focused on controlling costs," he added.

"Customers are looking to save money versus their committed spend," he added, sometimes to rein in cloud fleets that sprawled during the early months of the COVID-19 pandemic. "We have options for them to do that. They can manage workloads better. They can switch to lower-cost products that have different performance profiles. They can switch to Graviton chips that have higher cost/performance ratios."

Graviton is AWS's homebrew Arm-powered server silicon. If AWS moves more customers to those chips, it would be good news for the company, its customers, and the Arm ecosystem. But not good at all for the likes of AMD and Intel – the latter has already reported a nasty slump in server CPU revenue for its x86 offerings.

Olsavsksy also said AWS is struggling with energy bills "that are materially higher … up more than 2x over the last couple of years."

"So we're fighting through some of that as well, which is a new thing for the AWS business," he added.

On the company's earnings call, execs expressed optimism that whatever economic conditions prevail, Amazon is ready to handle the peak shopping loads that come with Q4. Inventory levels are pleasingly high, delivery times are low, and the company has optimized its affairs to utilize its transport fleets effectively and reduce long-distance shipments both within each market and when moving stock around the world.

Other cost control measures are also in force, but the company feels it has isolated them from the customer experience and is as well placed as anyone to enjoy a fine Thanksgiving and Christmas season.

May that optimism apply to the rest of us, too. ®

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