Last week, Amazon reported a blow-the-doors-off quarter. One leading Wall Street analyst described the results as a “game changer.” Going into the earnings report, analysts expected Amazon’s AWS cloud computing business to post revenue growth of about 30%. Instead, AWS delivered revenue growth of 37%. That is an extraordinary rate for the market leader in cloud computing.
AWS controls roughly half of the U.S. cloud computing market. Moreover, despite aggressively increasing capital spending, Amazon expanded operating margins. That margin improvement went a long way toward alleviating Wall Street’s concerns that the company was overspending on cloud infrastructure.
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Other parts of Amazon are also firing on all cylinders. Its advertising business continues to grow rapidly while generating expanding margins. Particularly impressive were the results from Amazon’s in-house semiconductor division, which designs the Trainium and Graviton chips. Trainium processors are designed to train large language AI models at a lower cost than comparable workloads running on Nvidia’s accelerated computing platforms. Graviton processors power cloud computing workloads, including web servers, databases, and enterprise applications. Amazon’s semiconductor business is on an annual revenue path of approximately $25 billion and has exceptionally strong prospects.
Investors responded enthusiastically. Analysts expect Amazon’s shares to continue delivering strong returns over the next several years. Long-term valuation models suggest the stock could more than double by 2030.
What makes Amazon’s earnings report even more impressive is that, before the quarter, Wall Street was increasingly skeptical about the investment plans of Amazon and the other hyperscalers. Those concerns have largely been put to rest. Amazon’s results, together with similarly strong reports from the other cloud computing giants, have convinced many investors that aggressive spending on AI infrastructure will generate substantial long-term rewards. Analysts project returns on invested capital of roughly 25 to 30%.
This is good news. After all, it’s clear that Amazon is critical to the future of the U.S. economy and to America’s national security.
The U.S. is engaged in a race with China for leadership in artificial intelligence. Following the introduction of less expensive open-source AI models by several Chinese companies, some analysts have argued that China will ultimately win the AI race. That conclusion is wrong. Pressure is building for policymakers to take stronger action against the theft of U.S. intellectual property embedded in advanced AI models developed by American leaders such as Anthropic, OpenAI, and Alphabet’s Google. In basic terms, Chinese AI companies frequently rely on “distillation” to copy and adapt the capabilities of frontier models developed by U.S. firms.
Today, because of massive investments in AI data centers by Amazon and the other American technology giants, the U.S. enjoys an estimated 10-to-1 advantage over China in AI computing capacity. U.S. AI companies are also orders of magnitude larger than their Chinese competitors. Fortunately, Alphabet, Amazon, Meta, Microsoft, Oracle, and now Nvidia are ignoring Wall Street’s earlier concerns about excessive AI spending.
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The latest earnings reports from the U.S. hyperscalers demonstrate that investment in AI infrastructure remains on a powerful upward trajectory. Just as important, these companies are proving to skeptics that AI data centers can generate very high returns on invested capital.
The U.S. will remain ahead in the AI race because of the scale and financial strength of its hyperscalers and because of the nation’s enduring commitment to entrepreneurship, innovation, and capitalism. But Washington must confront China’s rampant use of American AI research and development to boost its own products.
The writer owns shares in Alphabet Google, Oracle, and Nvidia.
James Rogan is a former diplomat who later worked in law and finance for over 30 years. Today, he writes a daily note on markets, economics, politics, and social issues. He can be reached at [email protected].
