amazon Faces Pressure to Revamp AWS Strategy Amidst AI Competition
Amazon is facing increasing scrutiny over the performance of its Amazon Web Services (AWS) division as competitors like Microsoft and Google gain ground in the rapidly expanding artificial intelligence (AI) cloud market. Recent financial reports and analyst commentary suggest AWS is struggling to capitalize on the AI boom, prompting calls for significant strategic changes.
AWS Growth Lags Behind Competitors
While Amazon’s overall retail business is performing well, AWS growth has not kept pace with its rivals. In the most recent reporting period, AWS growth failed to accelerate as was to be expected, and operating margins fell short of projections. Analysts at RBC Capital expressed concern that AWS may be facing a “bigger structural issue” in capturing its share of the AI-driven growth within the cloud sector.Evercore ISI analysts noted that while AWS backlog growth increased to 25%, the results and commentary from Amazon’s investor conference call did little to alleviate concerns that the company is “missing” the AI cloud opportunity. Bernstein analysts found the AWS strategy, as presented during the call, “less constructive than peers.”
Recommendations for AWS Improvement
Several recommendations have been put forward to address AWS’s challenges. These include:
Investing in Inferentia: further progress and promotion of Amazon’s Inferentia chips, designed for AI inference, is seen as crucial.
Strategic Partnerships: Seeking joint ventures with telecom and data center companies to share infrastructure costs could provide a competitive advantage.
Restructuring and Openness: A reorganization of AWS into dedicated AI product teams, empowered to act quickly, is suggested. This includes launching 5-10 integrated AI services by 2026,encompassing enhanced Bedrock capabilities,AI-powered databases,and developer tools comparable to those offered by Azure.
Potential Company Split: A more radical proposal involves splitting Amazon into two entities: “Amazon Services” (comprising AWS, Amazon ECommerce, and Amazon Entertainment) and “Amazon Products.”
Cultural and Leadership Challenges
Implementing these changes may prove arduous, partly due to Amazon’s established culture of internal innovation. The company traditionally prioritizes developing its own solutions, which could clash with the proposed partnerships.
Furthermore, some observers suggest that current CEO Andy Jassy, formerly the head of AWS, may have strategic blind spots. These could include an overemphasis on infrastructure as the primary solution to AI challenges and a dismissal of competitors’ success as temporary.
Analyst outlook and stock Performance
Despite the concerns surrounding AWS, analysts generally view Amazon stock as slightly undervalued. An average price target of $255.72, based on analysis from 52 covering analysts, suggests a potential 9.2% upside.However, analysts caution that achieving this gain will be contingent on accelerating revenue growth and improving operating profit within AWS.
As of early 2025, Amazon stock has experienced a 2.4% decline in value. unless AWS demonstrates significant improvement, realizing even modest gains may be challenging.
