By Deborah Mary Sophia and Greg Bensinger
July 30 (Reuters) - Amazon beat expectations for quarterly cloud sales growth and boosted its annual capital spending outlook, signaling demand for AI services remains strong enough to justify its massive infrastructure investments.
Shares in the Seattle-based online retailer climbed more than 9% after the market's close, following a 3.9% rise during the trading session.
Revenue at its cloud computing unit, Amazon Web Services, jumped 37% to $42.2 billion in the
second quarter ended June 30, compared with analysts' consensus estimate of a 31.21% increase, according to data compiled by LSEG.
"AWS is booming," CEO Andy Jassy said in a statement, noting it was the unit's fastest growth in 18 quarters. "Our AI and chips businesses each eclipsed run rates of more than $25 billion."
He said Amazon now expects capital expenditures to reach $220 billion this year, a 10% increase from an earlier forecast. Jassy said the cost of purchasing memory chips was a prime factor in the increase.
"Even at that amount, we will still not have enough capacity to meet all of the demand we have in 2026," he said on a call with investors. "I believe this dynamic will also be true in 2027 too."
Amazon's free cash flow turned sharply negative in the period. The company burned $7.6 billion of cash on a trailing 12-month basis in the second quarter, compared to $18.2 billion in free cash flow a year earlier.
Other big tech competitors, including Microsoft, Alphabet and Meta also reported big drops in free cash flow as they ramp up spending.
Still, the strong showing from the world's top cloud services provider mirrors solid performances from rivals Microsoft and Alphabet, both of which comfortably beat Wall Street estimates for cloud revenue.
"There were concerns about market share losses on AWS, but that's been put to bed now," said Dan Morgan, portfolio manager at Synovus Trust. "It just gives more evidence that AWS's lead is still intact. The AI tide is rising all boats here."
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The upbeat results could help quell some concerns over Big Tech's relentless AI investments — set to exceed $700 billion this year — which have strained cash flows at the traditionally cash-rich companies and sparked worries that they might be overbuilding capacity.
Companies including Amazon, however, have argued that the spending is crucial. The outlays, they say, help ease capacity constraints that have prevented them from fully meeting AI-driven demand, pointing to their ballooning contract backlogs.
Jassy sought to explain the company's massive capital outlay on the call. Amazon starts spending on data centers roughly two years before they open, which creates a period where cash is flowing out but revenue has not yet arrived, he said.
Once operational, however, those facilities can generate revenue for 30 years while AI servers typically recoup their cost in less than three years and then continue generating profits for another two to three years, he added.
His comment echoed those of Meta CEO Mark Zuckerberg on Wednesday.
Jassy said the "lion's share" of AWS compute capacity for 2027 had already been reserved by its customers, adding the company has "quite a bit of capacity" reserved for 2028 as well.
AWS has benefited from a growing roster of partnerships this year, including massive cloud infrastructure and chip supply deals with OpenAI, Anthropic, Meta, Pinterest and Snowflake.
The company said earlier this year that AWS' annual AI revenue run rate had surpassed $15 billion and was growing in a triple-digit percentage range, looking to reassure investors that its investments were generating clear returns.
Analysts have said Amazon will be able to sustain that level of growth as more data center capacity comes online over the next several months.
In its e-commerce business, Amazon has been rolling out faster delivery services globally and expanding to more rural areas of the U.S. to draw more shoppers.
The company also held its annual Prime Day event in the quarter, running from June 23 through June 26. The online shopping event featuring steep discounts saw customers snap up electronics, appliances and everyday essentials, with an Adobe Analytics estimate pegging total spending at over $26.4 billion.
Advertising, another closely watched metric, showed continued strength as Amazon packs more of its properties with marketing messages. The firm said ad sales rose 26% from a year earlier to $19.8 billion.
Amazon has been trying to reduce white-collar jobs through targeted layoffs since last year, including cutting 30,000 jobs from October through January of this year. But it finished the quarter with 1.595 million workers, 20,000 more than in the first quarter and 51,000 more than a year earlier.
(Reporting by Deborah Sophia in Bengaluru and Greg Bensinger in San Francisco; Editing by Sriraj Kalluvila and Nia Williams)
