Amazon’s (NASDAQ:AMZN) AWS has been driving the company’s total growth for several quarters. However, in Q2, the segment’s sales growth slowed sequentially, and bears are now wondering if its phenomenal run is coming to an end. However, this is not always the case. In this essay, I’ll use industry comparisons to illustrate why AWS’ second-quarter results were nothing short of remarkable and its growth momentum remains intact.
The Resilient Results
Let me begin by giving credit where credit is due. The platform and infrastructure cloud services markets are highly competitive, and organizations are always looking for new ways to expand their capabilities as new pockets of development arise. Yet, despite this tough rivalry, Amazon’s AWS has grown revenue regularly over the previous 33 quarters. This is a respectable accomplishment and a desirable one, in my opinion.
Amazon AWS’s revenue growth rate has slowed over the years, but that’s to be expected, given how large the company has grown. What worries investors the most is that AWS’s growth rate has slowed by 5,600 basis points in the previous four quarters. Investors are now questioning if this is the start of a longer-term downturn and, if so, how far lower can its growth rates go. While this is an understandable fear, there are two reasons investors should not be concerned just yet.
For example, during the previous four quarters, Microsoft’s (MSFT) Azure and Google Cloud’s (GOOGL) revenue growth rates have slowed by 8,000 bps and 9,300 bps, respectively. In comparison, Amazon AWS’s revenue growth rate has slowed by 5600 basis points, indicating that its performance has been reasonably stable.
The industry-wide growth moderation shows that expenditure on cloud services has recently been reduced due to adverse macroeconomic conditions. However, the fact that Amazon’s AWS was the least damaged in its peer group led me to conclude that its services are significantly more important among corporations. On the other hand, the same cannot be true for Microsoft Azure, Alibaba Cloud (BABA), and Google Cloud, as their growth has slowed more noticeably.
For the uninitiated, Amazon’s AWS dominates the worldwide cloud infrastructure and platform business. While others are catching up, they still have a long way to go before they can compete with Amazon’s dominant position in the area. AWS also accounted for approximately 16% of Amazon’s overall revenue last quarter. This implies that the section significantly contributes to the company’s bottom line. As a result, any swings are certain to impact Amazon’s finances. So we’ve established that Amazon AWS’s earnings in Q2 were respectable. But now the issue is, what lies ahead for the segment?
What Lies Ahead
Amazon’s management is bullish about AWS’s development and is increasing investment to support it. Although they did not provide particular amounts or segment-specific projections during the Q2 results call, they stated that they are increasing capital spending for AWS. The increased capacity, new products, and regional growth imply that Amazon’s AWS will continue to grow at its current rate in the foreseeable future.
AWS continues to expand rapidly, and we believe we are still in the early phases of commercial and public sector cloud adoption… As a result, we intend to spend slightly more on capital investments in 2022 than last year. Still, the share of capital spending varies among our companies. We anticipate an increase in technological infrastructure spending year over year to support the tremendous rise in innovation seen with AWS.
Second, Amazon Web Services (AWS) continues to be positioned positively (top-right corner) in Gartner’s quadrant for cloud infrastructure services. Other significant cloud suppliers, such as Microsoft Azure, Google Cloud, and Oracle (ORCL), have been in the field for more than five years. Still, according to the quadrant, they don’t even come close to competing with AWS in terms of value offer. This means that Amazon AWS’ user adoption will continue to rise, and its revenue growth momentum will stay strong in the next quarters, at least until the competition environment changes dramatically.
Finally, according to a Flexera poll, 76% of their respondents use Amazon’s AWS. This is a massive proportion of users that rely on Amazon for cloud infrastructure. Other cloud platforms cannot derail Amazon AWS’s growing momentum or entice customers away from its ecosystem. As a result, I anticipate that Amazon’s excursion into the cloud sector will continue to expand substantially in the coming years.
Even though other cloud companies are experiencing a sales slowdown, Amazon’s AWS continues to prosper. It’s not because of chance or coincidence but because of rigorous capital expenditure planning, tenacious execution, hardware upgrades, capacity expansions, and clever integrations with new and future cloud infrastructure software.
As a result, I expect Amazon’s AWS to continue growing quickly and drive the company’s total growth shortly. Moreover, in terms of valuation, Amazon’s stock sells at only 2.7 times its trailing twelve-month revenue. This is fairly modest compared to some of the other quickly developing cloud suppliers, making Amazon an appealing investment at current levels. As a result, investors with a long time horizon may choose to accumulate shares of the e-commerce behemoth in anticipation of price corrections.
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