Amazon's stock is falling, as this trend from earnings has investors worried
MarketWatch ·
By Emily Bary
AWS didn't see the same growth acceleration as its cloud rivals, raising questions about the returns on Amazon's high AI spending
Amazon.com Inc. isn't seeing the same cloud momentum as its peers, and that's weighing heavily on its stock Friday.
Whereas Microsoft Corp. (MSFT) and Alphabet Inc. (GOOG) (GOOGL) both showed major growth pickups in their cloud businesses, Amazon Web Services' results didn't pack quite the same punch. Amazon's (AMZN) second-quarter cloud revenue essentially matched expectations at $30.9 billion, up 17.5% from a year before. That was above the 16.9% clip seen in the first quarter, but the acceleration was marginal, in the view of a Roth Capital Partners analyst.
Microsoft Azure and Alphabet's Google Cloud both saw bigger growth pickups and big beats relative to expectations.
The comparative results raised questions on Wall Street about whether Amazon is doing enough to capitalize on artificial-intelligence demand for cloud services, even as it spends heavily on AI infrastructure. Amazon's stock is down nearly 7% in Friday morning action.
The company's quarterly cash capital expenditures were $31.4 billion in the quarter, up from $24.3 billion in the March quarter, and Amazon expects similar outlays for each of the remaining two quarters of the year. That suggests to Roth Capital Partners analyst Rohit Kulkarni that this year's capex could approach $120 billion, versus the prior suggestion of a $100 billion outlook.
Is the company getting enough return on that investment? That's an increasingly key issue.
"AWS remains the cloud GOAT" - meaning the greatest of all time - "but Azure and [Google Cloud] are catching up fueled by AI petrol while AWS' tank appears to be delivering less power," Bernstein's Mark Shmulik wrote in a note to clients. "This AI race is a marathon, and AWS has some catching up to do."
In his view, "management's commentary on competitive positioning and trajectory sounded less constructive than peers."
AWS was a hot topic on the call, with Amazon Chief Executive Andy Jassy telling investors that when you look at growth, "these are all really just moments in time."
"When we look at the results over the last number of quarters, there are some times where, as far as we can tell, we're growing faster than others and sometimes others are growing faster than us," he said. "But it's still, if you look at second-place player ... it's still a pretty significant ... market-segment leadership position that we have."
Amazon's security offerings in the cloud seem to be resonating on a relative basis, he added.
MoffettNathanson's Michael Morton wrote that "the entirety of our discussions on Amazon have focused on the need for AWS to reaccelerate, and the debate if the company is falling behind in AI while also beingunderserved [graphics processing units]" by Nvidia (NVDA).
"For what it's worth, in our conversation with the company, they do not believe they are being deprioritized versus the competition with their allocation of GPU chips, an encouraging data point," Morton wrote.
UBS's Stephen Ju said that "part of the pullback in [Amazon] shares was due to the lack of a more explicit confirmation of potential revenue acceleration, even as [capex] budgets for AWS?work higher."
But he thought the post-earnings selloff in Amazon's stock seemed excessive as, by his math, "the difference between rounding up to reach the high end of investor expectation of 18% for AWS [year-over-year] growth vs rounding down to just 17% and therefore a 'miss' is some $10 [million] in revenue," which is fairly negligible for a company doing about $31 billion in revenue a quarter.
Nonetheless, the cloud performance and commentary overshadowed upbeat results in the cloud.
"If Amazon's retail business was a standalone entity, it would be trading dramatically higher following the near perfect results that lead us to raise our retail profitability outlook materially, enough to overpower our negative revisions to the AWS [operating-income] outlook," MoffettNathanson's Morton wrote. "Unfortunately, as we all know, the success of the retail business is not what's going to matter in the near term for Amazon's stock price."
See more: Apple's earnings were good, but the initial stock move implies Wall Street is wary
-Emily Bary
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