The CapEx Conquest in the Cloud

Amazon announced their earnings yesterday. Like Microsoft & Google, Amazon’s Web Service business is seeing a surge of growth, up from 13% annual to 17% annual growth (16% when excluding the leap year).

Aside from the overall growth of these clouds increasing, the massive investment in CapEx data centers, power plants, and GPUs is stunning.

These are not one-time investments, but part of a broader trend that started to occur after the introduction of GPT 3 in mid-2020 Amazon was the first to invest significantly.

Google and Microsoft would wait another two years to replicate a similar level of investment.

Each of these businesses are large enough to justify it. Here are some highlights from Amazon’s earnings :

“We see considerable momentum on the AI front where we’ve accumulated a multibillion-dollar revenue run rate already.”

Over time, we should expect Amazon and Google, amongst others, to start to compete with Nvidia GPUs, offering their own which should meaningfully improve margins.

“We have the broadest selection of NVIDIA compute instances around, but demand for our custom silicon, Trainium and Inferentia, is quite high given its favorable price performance benefits relative to available alternatives. Larger quantities of our latest generation Trainium2 is coming in the second half of 2024 and early 2025.”

And those margins are increasing for the clouds, which should catalyze more companies, especially the largest spenders, to think about managing their own infrastructure. 8 percentage points increased margins in a quarter is titanic.

“AWS margins increased 8 basis points sequentially off Q4”

If we needed any reminder, Amazon Web Services is now a $100 billion runway business, growing 17% a year, or adding $150b in market cap per year at a 9x multiple.

“Moving to AWS. Revenue was $25 billion, an increase of 17% year-over-year, and AWS is now a $100 billion annualized revenue run rate business."