Is Microsoft putting pressure on Amazon.com’s success in cloud computing?
With the CFO of tech giant Amazon warning that AWS cloud-computing unit growth rates in April were running 500 basis points lower than what was seen in the first quarter, which brought its own slowdown, this is a key question coming out of Amazon’s AMZN, -4.06% late Thursday earnings report. It seemed like a much harsher message than the one struck by Microsoft Corp. executives earlier in the week.
In the March quarter, Amazon had 16% increase in its AWS business, while Microsoft saw 27% growth in its Azure cloud-computing arm “and spoke confidently about robust growth going forward,” as analyst Richard Windsor of Radio Free Mobile noted.
He stated, “Amazon attributed this to cost optimization on the part of its customers, but one can’t help but wonder why Amazon is seeing this and Microsoft is not.”
While Windsor acknowledges that Microsoft’s Azure may be better off thanks to generative AI and the company’s ties to ChatGPT creator OpenAI, he is skeptical that technology is already driving the differential to the extent implied by the most recent results and commentary.
In light of Amazon’s efforts to cut costs and increase profitability, Windsor opined that Microsoft’s Azure platform was making “steady progress” relative to AWS in general.
After initially rising Thursday after the market closed due to better-than-expected first-quarter results, Amazon shares have fallen by 1.5% in Friday premarket trade.
Though he admitted that “AWS revenue outlook was light (particularly post MSFT and GCP [Google Cloud]),” RBC Capital Markets analyst Brad Erickson was more optimistic about the long term, saying, “It’s not clear that Q2 (or even Q3) necessarily represents the trough.”
“In the past, when there was a lot of fear like this, it was a good time to buy AMZN stock,” Erickson wrote, reiterating an outperform rating and a $135 target price. The stock is likely to lag in the short term, but “we think an eventual AWS reacceleration amid rising retail profitability would likely be handsomely rewarded,” he added.
Mark Shmulik of Bernstein made a joke about how the cloud drama at Amazon has led to some interesting changes.
He said, “You know things must be really messed up at AWS when investors tell us they’d really just like to own Amazon’s retail business.” “And we don’t blame them,” because Amazon’s profit growth in retail has been so amazing.
But he wasn’t too worried about AWS either because he thought that the growth rate of 11% for April wasn’t too different from the growth rate at the end of the first quarter.
Even though Amazon didn’t talk about AI as much as its competitors did on its results call.
“To be fair, management’s comments about AI on the earnings call didn’t give me as much confidence as some of AWS’s competitors,” he wrote. “But talk is irrelevant.”