Amazon catches a storm in the cloud, but 'significant fear' may mean opportunity

By Emily Bary

AWS slowdown sparks debate, with one analyst worried about Microsoft competition and others cheering long-run potential

Is Microsoft Corp. raining on Amazon.com Inc.'s parade in cloud computing?

That's a key question coming out of Amazon's (AMZN) late Thursday earnings report, as the technology giant's chief financial officer warned that April growth rates for the AWS cloud-computing unit were running 500 basis points lower than what was seen in the first quarter, which brought a slowdown of its own. It seemed a more severe message than what Microsoft Corp. (MSFT) executives struck earlier in the week.

Read: Amazon stock gives up gains as CFO admits AWS growth rates are declining further

Amazon saw 16% growth in its AWS business during the March quarter, while Microsoft saw 27% growth for its Azure cloud-computing unit "and spoke confidently about robust growth going forward," wrote Richard Windsor, an analyst at Radio Free Mobile, a boutique research operation.

"Amazon put this down to cost optimisation at its customers but one can't help wondering why Amazon is seeing this and Microsoft is not," he wrote.

It's possible that Microsoft's Azure is benefiting from generative artificial intelligence and the company's ties to ChatGPT creator OpenAI, but Windsor isn't sure that technology is already driving the differential to the extent implied by the most recent results and commentary.

"Hence, I think that Azure continues to gain ground on AWS more generally which is of concern especially as Amazon is trying to reduce costs and be more profitable," Windsor wrote.

Amazon shares are off 1.5% in premarket trading Friday, following an initial aftermarket rise Thursday as the company's first-quarter results came in better than expected.

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Others were more upbeat, including RBC Capital Markets analyst Brad Erickson, who cheered the long term even while acknowledging that the "AWS revenue outlook was light (particularly post MSFT and GCP [Google Cloud]) and it's not clear that Q2 (or even Q3) necessarily represents the trough."

"On its call, MSFT spoke to lapping optimizations being the end of the headwinds whereas AMZN sounded to us much more uncertain that lapping optimizations would actually mean the end, though this was not concerning," Erickson continued.

Executives at both Amazon and Microsoft noted that customers are still looking to "optimize" spending as they deal with economic uncertainty, but Microsoft's CFO specifically called out that "at some point, workloads just can't be optimized much further" and comparisons can ease.

While Erickson he thought the lack of certainty on an AWS growth bottom "will make near-term stock appreciation challenging," he also saw opportunity.

"Moments of significant fear like this historically have proved to be opportune times to build positions in AMZN, and while the stock is likely to lag near-term, we think eventual AWS reacceleration amidst ramping retail profitability would likely be handsomely rewarded," Erickson wrote, while reiterating an outperform rating and $135 target price.

Bernstein's Mark Shmulik quipped that Amazon's cloud drama has led to some interesting dynamics.

"You know things must be really upside down in AWS-land when we're hearing from investors that they'd really just like to own Amazon's retail business," he said. "And we don't blame them," given Amazon's impressive profit improvements in retail.

But he wasn't overly concerned about AWS either, figuring that the implied 11% April growth rate wasn't so dramatically off from the exit rate of the first quarter.

"We joke that AWS has become the Google Search of Amazon's stock -- it has to work for the stock to work, which is fair considering AWS accounts for all of Amazon's Operating Income, and then some," he wrote, as he maintained an outperform rating and $125 target price on the stock. "We're still quite comfortable with the long-term growth potential of the cloud and Amazon's market position within it."

That's even as Amazon didn't deliver the same level of AI hype on its earnings call that its rivals did.

"To be fair, management's commentary around AI on the earnings call didn't inspire a lot of confidence like some of AWS' competitors," he wrote. "But talk is irrelevant."

-Emily Bary

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04-29-23 1040ET

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