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Amazon‘s Cloud Unit Faces Scrutiny Amidst AI race, retail Strength Offers Solace
Amazon Web services (AWS), a long-standing titan in the cloud computing arena, recently reported June-quarter revenues that narrowly surpassed Wall Street’s expectations, marking a 17.5% year-over-year increase. However, this growth considerably trailed the robust 39% expansion achieved by Microsoft Azure and Google Cloud‘s extraordinary 32% gain. This performance has raised concerns that AWS is falling behind its key rivals,Microsoft and Alphabet,in the burgeoning artificial intelligence (AI) sector.
The disappointing cloud growth occurred despite amazon’s substantial capital expenditure, which reached $31.4 billion, exceeding that of its competitors. Furthermore, the company signaled an even more enterprising spending plan for the full year, projecting outlays of over $118 billion. While Google and Microsoft also announced increased investments, their markets responded positively, viewing the spending as a justified investment in AI’s potential as a notable growth catalyst across their operations.Both tech giants are channeling billions into data centers and advanced chip technology, essential for overcoming supply chain bottlenecks that are currently hindering their ability to meet the surging demand for AI services.
“The focus was squarely on AWS, and its performance didn’t quite meet the heightened expectations,” commented Matt Britzman, senior equity analyst at hargreaves Lansdown. “While Microsoft and Alphabet have demonstrated considerable momentum in their cloud growth,AWS did not deliver the resounding success many anticipated.”
Adding to the concerns, escalating expenses are beginning to impact AWS’s profit margins. Historically the bedrock of Amazon’s profitability, accounting for approximately 60% of its operating income, AWS saw its margins contract to 32.9% in the quarter – the lowest point as late 2023. Amazon also provided a forecast for the current quarter’s total operating income that fell short of market projections.
During an earnings call, CEO Andy jassy acknowledged that the AI landscape is still in its nascent stages. He expressed confidence that Amazon’s vast cloud infrastructure, considerably larger than its competitors’, is well-positioned to capitalize on AI opportunities once capacity constraints begin to ease.Despite the cloud-related headwinds, Amazon’s stock, which has climbed 6.7% year-to-date, saw a dip in early trading, potentially wiping out around $170 billion in market value if the losses persist. The company continues to trade at a premium valuation, with a 12-month forward price-to-earnings ratio of 33.87, closely mirroring Microsoft’s 34.19 and significantly higher than Alphabet’s 18.64.
Retail Resilience Provides a Counterbalance
Adding a layer of optimism, a significant number of analysts, at least 30, have maintained or increased their price targets for Amazon’s stock, with a median target of $260. This confidence is partly attributed to the robust performance of Amazon’s retail division. The e-commerce giant has demonstrated remarkable resilience,weathering the impact of tariffs imposed by the Trump administration,which have adversely affected many retailers and their supply chains.jassy reported that Amazon has not experienced a decline in consumer demand or a significant price increase in the first half of the year, with online store sales surging by a better-than-expected 11% in the second quarter. Analysts suggest that manufacturers and suppliers have absorbed the majority of the tariff-related costs thus far,though they note that much of the inventory sold in the recent quarter was acquired in the preceding period.”If Amazon’s retail business were a standalone entity, its near-perfect results would have propelled its valuation significantly higher,” stated Michael Morton, an analyst at MoffettNathanson.”However, as we all recognise, the immediate trajectory of amazon’s stock price will likely be dictated by factors beyond the success of its retail operations.”