The advent of cloud computing was a pivotal moment in technology. Giving companies the ability to build apps, rent computing power, and rent and access software, all with nothing more than an internet connection, was a game changer and helped kickstart the digital transformation.
One of the pioneers of cloud infrastructure services was Amazonia (AMZN 0.17%). When the company formally launched Amazon Web Services (AWS) in 2006, it kickstarted a race among the world’s biggest tech titans to offer cloud computing services.
Amazon has always been – and continues to be – the undisputed leader in the industry, but its recent results have investors wondering whether the tide could turn, putting the company’s biggest moneymaker at risk.
When Amazon reported its first-quarter results last week, one of the more eye-catching developments was the notable slowdown in growth of its cloud infrastructure segment. AWS generated approximately $21 billion in revenue, up 16% year-over-year. For context, AWS revenue was up 36% in the prior year period, and its expansion has slowed with each passing quarter. A deceleration of this magnitude shouldn’t be taken lightly, as it marked the slowest growth rate since Amazon began reporting results for its cloud business in 2014.
Furthermore, this takes on added significance when viewed against the backdrop of Amazon’s overall results. Evidence clearly shows that cloud computing is the company’s most important business. In 2022, AWS generated over 15% of Amazon’s net sales and All of its operating income, including by subsidizing its North American and international e-commerce businesses. This isn’t an unusual occurrence for Amazon; the cloud infrastructure business has been its biggest revenue generator for years.
Taking a step back
Even if the results seem worrying at first glance, it is important to put these numbers into context. Macroeconomic conditions have caused a large decline in cloud growth as companies cut spending in response to the current economic climate.
In its third fiscal quarter (which ended March 31), Microsoft (MSFT -0.64%) Azure grew 27% year over year, slowing from the 46% growth in the prior year period. Alphabet‘S (GOOGL 2.08%) (GOOG 1.91%) Google Cloud also felt the hit, up 28% year over year after generating 44% growth in the year-ago quarter.
A look at the market in general suggests that things haven’t changed much. Worldwide spending on cloud infrastructure grew 20% year over year in the first quarter, according to data compiled by Synergy Research Group. At the same time, Amazon controlled 32% of the market, followed by 23% of Microsoft Azure and 10% of Google Cloud. In the same quarter last year, Amazon had a 33% market share, followed by Azure with 22% and Google with 10%.
This shows that while AWS has given some of its market share, about 1 percentage point, to Azure, it is still distant too early to draw conclusions.
The worst is over?
There may be more pain ahead for the cloud drive. In his earnings call, CFO Brian Olsavsky noted that year-over-year cloud growth in April was about 5% “lower than what we saw in the first quarter,” as customers sought to “optimize their cloud spending in response to these challenging economic conditions in the first quarter.”
On a more optimistic note, Olsavsky went on to say that “few people appreciate how much new cloud business is going to happen in the next few years from the impending deluge of machine learning that’s coming.”
There are a number of reasons why Amazon’s cloud market share has declined. It may be that some of your clients are more sensitive to current economic conditions. It’s also possible that Microsoft has seized a temporary benefit from all the gains in generative AI and its $13 billion investment in ChatGPT’s parent company, OpenAI.
So while the situation in AWS is certainly worth watching, it’s still too early to sound the alarm.
Suzanne Frey, an executive at Alphabet, is a member of the board of directors of The Motley Fool. John Mackey, former CEO of Whole Foods Market, a subsidiary of Amazon, serves on the board of directors of The Motley Fool. Danny Vena has positions in Alphabet, Amazon.com and Microsoft. The Motley Fool has positions in and recommends Alphabet, Amazon.com and Microsoft. The Motley Fool has a disclosure policy.
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