Shares of Amazon.com Inc. edged higher in late trading today after the company reported better-than-expected first-quarter earnings and revenue, as cloud computing sales topped analysts’ expectations.

The company reported adjusted earnings of $2.78 per share, crushing Wall Street’s forecast of just $1.64 per share, while revenue for the period increased 17% from a year earlier, to $181.52 billion, surpassing the $177.3 billion target. All told, Amazon delivered a net profit of $30.3 billion at the end of the quarter, up from $17.1 billion in the year prior.

The all-important Amazon Web Services cloud infrastructure business unit chipped in with sales of $37.59 billion during the quarter, up 28% from a year earlier. It accounted for almost 21% of the company’s total sales, and came in ahead of the $36.64 billion analyst target.

AWS remains the undisputed leader in the cloud computing infrastructure market, but its lead continues to be eaten away by rivals such as Microsoft Corp. and Alphabet Inc., whose respective cloud units. Earlier today, Microsoft reported that sales from its Azure cloud and related services jumped 40%, while Alphabet’s Google Cloud unit grew by an impressive 63%.

Amazon’s cloud business remains critical to its bottom line. During the quarter, its operating income increased by 23%, to $14.16 billion, well ahead of the Street’s $12.84 billion consensus estimate.

In recent months, Amazon and its rivals have been trying to justify their ongoing multibillion-dollar outlays on artificial intelligence infrastructure. In February, the company said its capital expenditures are likely to hit $200 billion this year, a sharp rise from the year before.

The company has announced a number of major deals with AI firms including OpenAI Group PBC, Anthropic PBC and Meta Platforms Inc. in recent months that may have helped to ease some investor’s concerns that its spending will eventually generate a return. However, those agreements may also put pressure on the company to build even more data centers to provide the compute infrastructure its customers will need.

Chief Executive Andy Jassy (pictured) told analysts on a conference call that the company’s custom chip business, which includes processors such as Graviton, Trainium and Nitro, saw its annual revenue run rate exceed $20 billion for the first time. “We’re in the middle of some of the biggest inflections of our lifetime, we’re well-positioned to lead, and I’m very optimistic about what’s ahead for our customers and Amazon,” he said.

The company reported that expenses relating to property and equipment surged to $44.2 billion during the quarter, ahead of the Street’s $43.6 billion projection, while its free cash flow for the last 12 months declined to $1.2 billion, down 95% from a year earlier. That drop was primarily a result of AI investments, the company said.

Amazon’s capital expenditures are also rising from the need to invest in its nascent satellite internet service, called Leo. It’s a rival to Elon Musk’s Starlink, and the company aims to launch commercial operations in the third quarter of the year, said Chief Financial Officer Brian Olsavsky. He explained that the company is racing to build more satellites and get them booked on rocket launches to expand Leo’s constellation. Currently, it has just 270 satellites operational, but wants to expand to about 7,700.

After the quarter closed, Amazon said it had agreed to an $11.6 billion deal to acquire Globalstar Inc., a publicly traded operator of internet satellites. Once the deal concludes, it will become the second-largest in Amazon’s history. “They have unusual and scarce global spectrum that’s required to provide direct to device,” Jassy told analysts on the call. “We also really like the satellite knowhow that we’ll get as part of that merger.”

Jassy also revealed that the acquisition would enable Amazon to build a deeper relationship with Apple Inc., which owns a 20% stake in Globalstar. The iPhone maker has already finalized plans to use Globalstar’s satellite connectivity services, and will now use Leo’s services instead, the CEO said.

Holger Mueller of Constellation Research said Amazon had a better quarter than the investor’s reaction implied, showing strong growth across all of its regions and major product lines. He added that AWS is on track to surpass the revenue generated from its international online retail business, falling just $2 billion shy of that number. Being able to grow its operating profit and bottom line was also quite a feat, considering its massive infrastructure investments, he added.

“Purchases of property and equipment reached an all-time high at $147 billion, but AWS’s operating margin has recovered to 37+%, which is a good sign it can sustain its spending,” Mueller said. “On the other hand, Amazon’s free cash flow hit a record low, so it will be interesting to see what this mean for shareholder’s investment appetites in the coming quarter.”

Looking ahead to the current quarter, Amazon said it’s anticipating revenue of between $194 billion and $199 billion, ahead of the Street’s consensus target of $188.9 billion.

Elsewhere, Amazon’s online stores business, which is still its largest in terms of revenue if not profit, generated $64.3 billion in sales, up 12% from a year earlier and above the analyst forecast of $62.7 billion. Advertising revenue increased 24%, to $17.24 billion, ahead of the Street’s target of 21.2% growth. The segment is one of Amazon’s fastest-growing and most profitable units, with the bulk of its sales coming from sponsored product listings on the Amazon.com website.

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