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Amazon: Time to Stockpile Shares

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For many quarters, Amazon’s (NASDAQ:AMZN) total growth has been driven by AWS. But this time, the segment’s revenue growth slowed sequentially in Q2. Bears are now speculating as to whether the segment’s incredible run is about to come to an end. That likely won’t happen. I’ll use industry comparisons to illustrate why AWS’ Q2 results were nothing short of outstanding and why its growth momentum is still strong in this article.

Amazon’s AWS Is Resilient

I’ll start by giving fair credit to those who deserve it. There is fierce rivalry in the platform and infrastructure cloud services sectors, and companies are constantly looking to launch new products as soon as new growth areas appear. However, despite this intense rivalry, Amazon’s AWS has continually increased revenue over the last 33 quarters. I think this is an incredible accomplishment and a desirable situation.

The revenue growth rate for Amazon AWS did slow down over time, but that was to be expected, given how rapidly the company has expanded. Investors are more worried that AWS’s growth rate has slowed by 5,600 bps just over the past four quarters. Investors are already speculating about whether this is the start of a protracted slowdown and, if so, how much farther its growth rates can fall. Even though this is a legitimate worry, there are two reasons why investors shouldn’t worry just yet.

First, Amazon AWS’s growth rate is still faster than in 2019 and 2020. This indicates that the segment’s performance remains excellent when viewed alone.

Second, the growth tempo for other cloud platforms has markedly slowed over the previous four quarters. For instance, over the past four quarters, the revenue growth rates for Google Cloud (NASDAQ:GOOGL) and Microsoft Azure (NASDAQ:MSFT) have decreased by 8,000 basis points and 9,300 basis points, respectively. In contrast, Amazon AWS’s revenue growth rate has slowed down by 5600 bps, indicating that its performance has been more stable over time.

The industry’s overall growth slowing points to recent expenditure reductions on cloud services due to challenging macroeconomic conditions. However, the fact that Amazon’s AWS was the least affected in its peer group makes me think that businesses view its services as more crucial overall. However, the same cannot be accurate for Google Cloud, Alibaba Cloud (NYSE:BABA), and Microsoft Azure, whose growth slowed down more noticeably.

Unbeknownst to the general public, Amazon’s AWS currently controls the global cloud infrastructure and platform market. Even though other companies are catching up, they still have a long way to go before they can begin to match Amazon’s dominant position in the industry. Also, for the record, AWS accounted for over 16% of Amazon’s total revenue last quarter. This indicates that the section significantly contributes to the company’s top line, and any changes there are likely to impact Amazon’s financials.

We now know that Q2 results for Amazon AWS were strong. But now the issue is, what is in store for the segment?

What’s Next

First, AMZN’s management is increasing investment in anticipation of AWS’s further development. On the Q2 earnings call, they mentioned that they are ramping up capital spending for AWS, despite not providing particular numbers or giving segment-specific guidance. The increased capacity, new services, and geographic growth indicate that Amazon’s AWS will probably keep expanding at its current rate shortly.

We think that cloud adoption in the public and business sectors is still in its infancy, notwithstanding the rapid growth of AWS. We anticipate spending slightly more on capital investments than we did the previous year during the 2022 period, although the distribution of capital spending changes among our businesses. Specifically, to support the explosive growth in innovation we are witnessing with AWS, we anticipate spending on technological infrastructure will increase year-over-year.

Second, Amazon’s AWS remains favorable in Gartner’s quadrant for cloud infrastructure services. Although they have been active in the market for more than five years, other well-known cloud vendors such as Microsoft Azure, Google Cloud, and Oracle (NASDAQ:ORCL) are not even close to AWS regarding value offer. This again shows that, at least until the competitive environment doesn’t change significantly, Amazon AWS’ user adoption will keep increasing, and its revenue growth momentum will stay high.

Last but not least, a Flexera poll found that 76% of its participants used Amazon Web Services (AWS). This is a tremendous number of users who depend on AMZN for their cloud infrastructure requirements. It’s a blatant sign that competing cloud computing platforms can’t stop Amazon AWS’ growth momentum or lure customers away from its ecosystem. Therefore, I anticipate that the e-commerce giant’s entry into the cloud vertical will continue to expand quickly in the years to come.

Bottom Line

Amazon’s AWS is still doing well, despite the sales dip that other cloud competitors are experiencing. It’s not by chance or accident; instead, it results from aggressive capital expenditure planning, tenacious execution, hardware upgrades, capacity increases, and clever integrations with recently released and upcoming cloud infrastructure software.

Therefore, I anticipate Amazon’s AWS to keep expanding quickly and driving the company’s total growth in the near future. Regarding valuation, Amazon stock is only worth 2.7 times its trailing twelve-month revenue. When compared to some of the other quickly expanding cloud companies, this is pretty cheap, making Amazon an attractive investment at the moment. Therefore, on anticipated market corrections, investors with a long-term time horizon could choose to stockpile shares of the e-commerce giant.

Featured Image-  Megapixl @Michaelvi

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