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One State is Poised to Benefit From Big Amazon Cloud Expansion

Amazon will invest $35 billion more into AWS, its cloud company, despite its recent layoffs.
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Tech giant Amazon  (AMZN) - Get Free Report plans to invest another $35 billion into its cloud division, Amazon Web Services, even though it has cut 18,000 employees.

The tech company said on Jan. 20 the additional investment will expand its AWS data centers in Virginia and will take over a decade.

By 2040, AWS will construct several data centers throughout the state and plans to hire 1,000 employees.

The tech giant has already spent $35 billion in building data centers in the northern part of the state, employing 3,500 people on a full-time basis from 2011 to 2020, AWS said in 2021.

Amazon's large investment in the state could include tax exemptions on purchasing software and equipment and the company could receive a state grant to help it offset costs.

Virginia has been working on creating a new "Mega Data Center Incentive Program." If the program is approved by state lawmakers, AWS could receive a maximum 15-year extension of data center sales and use tax exemptions on equipment and software.

A state grant of a maximum of $140 million "for site and infrastructure improvements, workforce development, and other project-related costs" could also apply to AWS when it constructs the new data centers.

Big tech companies have been slashing their headcount, including Amazon who is cutting back by laying off 18,000 employees in its devices, books, people, experience and tech teams.

Shares of Amazon have rebounded since it dropped by 32.54% within the past year. Amazon's stock increased by 14.38% during the past month.

Amazon's Outlook Is Upbeat

Analysts remain bullish on the outlook of Amazon - 49 have a buy rating, three have a hold and one has a sell rating rating, according to a survey by FactSet.

The layoffs will save the tech behemoth $3.6 billion, according to Morgan Stanley equity analyst Brian Nowak who maintained his overweight rating and price target of $140 a share.

"This is an important step, but we look for even more discipline on AMZN's $10-$15bn of non-core spend," he wrote in a Jan. 5 research report. "Stepping back, AMZN’s confirmed headcount reductions (following META and many other tech companies’ reductions) are important symbolically as they speak to another tech company making difficult (but required) decisions on how to better manage cash flow through a potentially more challenging 23/’24...while also continuing to invest to maintain leadership in '24 and beyond."

Amazon is expected to improve its profit margins during the second half of 2023, he said in a Jan. 17 research note.

"We see AMZN continuing to grow into its fulfillment overbuild, deliver on non-core opex cuts and showcase its still leading e-commerce profit generating position," Nowak wrote. "Near-term Street profit estimates still seem too high but see AMZN as an outperformer after expectations are adjusted and profitability improves in 2H."

Oppenheimer analyst Jason Helfstein kept his outperform rating on Amazon's stock with a target price of $130 despite lowering estimates for revenue generated by AWS’s revenue for the fourth quarter of 2022 by 1% and all of 2023 by 3%.

“Amazon’s Web Services segment is now the global leader in cloud computing and has significant value,” he wrote on Jan. 13.

The outlook for the economy remains up in the air as fears of a recession and slower growth are anticipated.

During the third quarter, AWS generated revenue $20.5 billion while Amazon produced sales of $127.1 billion.

Businesses are likely to spend less money on technology even if the economy does not enter into a recession. The outcome of the plan by the Federal Reserve to beat inflation by raising interest rates quickly remains uncertain. 

“In the uncertain economic environment, we believe that enterprise customers are looking to reduce IT spending by pausing migration or trading down products, creating demand volatility,” James Lee, a Mizuho analyst, wrote in a Jan. 12 research note. “Although AWS has strong long-term customer commitments with backlog up 60% year-over-year, we recognize that demand can be fluid from year to year.”

Lee kept his buy rating on Amazon and the $135 price target.