Amazon Faces AI Criticism Despite Thriving Financial Performance

Amazon (NASDAQ: AMZN) has drawn criticism over the years for various issues. Known for its fierce competitiveness—occasionally labeled as anticompetitive—Amazon has faced accusations of abusive practices and has been scrutinized for a long time due to its profit margins.

Today, Amazon stands as one of the world’s most valuable companies, boasting a market cap of $2 trillion and generating substantial cash flow. However, a new critique is emerging: some argue that Amazon is lagging in the artificial intelligence (AI) arena, and there’s data to support this claim.

Amazon’s Journey in the AI Landscape

In contrast to several of its tech rivals, Amazon has not yet made significant strides with a large language model (LLM). Competing giants have already launched their own projects—Alphabet with Gemini used on search pages, Meta Platforms with Llama powering its AI chatbot, and Microsoft leveraging Copilot along with a partnership with the top AI startup, OpenAI, known for ChatGPT.

Recognizing a potential gap in its AI offerings, Amazon announced a $4 billion investment in AI safety and research company Anthropic in March, joining Alphabet in acquiring stakes in a notable OpenAI competitor.

The most promising AI opportunity for Amazon lies with Alexa, its voice-activated device that leads in market share. However, the company has faced technical challenges that have hindered its progress in capitalizing on this potential.

While Amazon is gradually entering the AI scene with Bedrock—its service offering various LLMs for Amazon Web Services (AWS) customers—this venture differs from developing its own cutting-edge model. Bedrock functions more as a feature within its cloud services than as a standalone AI application.

Though it may seem that Amazon is starting behind in the AI race, its slow entry may not be detrimental in the long run. The company’s third-quarter earnings report illustrates how its stock may continue to rise despite not yet leading in AI technology.

Image source: Amazon.

Consistent Growth and Expanding Margins

Amazon currently showcases one of the best business models among companies on the stock market. Its growth is largely driven by high-margin businesses that have been developed amidst its traditional lower-margin sectors, which initially endeared it to consumers.

In the third quarter, Amazon achieved an 11% year-over-year revenue increase, totaling $158.9 billion, surpassing estimates of $157.2 billion. This growth translated into a remarkable 55% rise in operating income, reaching $17.4 billion, resulting in an operating margin of 11%.

Significant profit increases were noted across all three of Amazon’s operational segments—North America, International, and AWS—and familiar drivers contributed to this margin growth.

Revenue from third-party seller services rose to $37.9 billion, while subscription services, primarily from Prime, saw an 11% increase to $11.3 billion. Advertising revenue climbed 19% to $14.3 billion, with AWS revenue also increasing by 19% to $27.5 billion.

These segments benefit from Amazon’s historical investments in e-commerce and cloud infrastructure, facilitating further profit expansion. Operating expenses rose only 7.3% in the quarter, which positively impacted earnings—pushing earnings per share from $0.94 to $1.43.

Is AI Essential for Amazon’s Future?

Amazon is not looking to fall behind in the AI landscape. The company has stated that AWS’s AI business now boasts a multibillion-dollar revenue run rate. Impressively, this sector is expanding three times faster than AWS did during its early stages.