Market Analysis

All Eyes on Amazon: Cloud Business Put to the Test

Amos Simanungkalit · 06 Feb12.1K Views

Image Credit: Bloomberg

Amazon.com faces high expectations for its cloud computing performance in its upcoming fourth-quarter earnings report on Thursday. Investor confidence in Big Tech's billion-dollar AI investments has been shaken following disappointing results from Microsoft and Google.

Tech stocks surged over the past two years, driven by optimism that artificial intelligence-driven data center demand would fuel long-term investments. However, a selloff in technology stocks followed after Chinese startup DeepSeek claimed AI advancements at a significantly lower cost, leading some to believe the market correction was overdue.

Despite this, analysts suggest Amazon may be in a stronger position than its competitors to benefit from cost-efficient AI due to its dominant cloud business and lower dependence on expensive large-language models like those powering ChatGPT. Additionally, Amazon is expected to unveil its long-awaited Alexa generative AI voice service later this month, according to sources familiar with the matter.

Amazon Web Services (AWS), the world's leading cloud provider, is projected to report its strongest revenue growth in eight quarters, with a 19.3% increase, based on LSEG data. However, recent concerns over AI-related spending have weighed on tech stocks. Microsoft and Meta defended their AI investment plans last week, while Alphabet’s shares dropped 8% on Wednesday after announcing higher-than-expected capital expenditures.

"Microsoft and Google’s results have intensified scrutiny on Amazon’s cloud growth," said Dave Wagner, portfolio manager at Aptus Capital Advisors, which holds shares in all three tech giants. "But if Amazon delivers strong cloud numbers, the market will react positively."

Amazon was the first major cloud provider to adopt DeepSeek’s AI models last month and has stated that its capital spending, primarily on AI, will exceed the $75 billion initially estimated for 2024. However, concerns remain as Microsoft Azure and Google Cloud—AWS’s closest rivals—have reported slowing growth, raising questions about whether Amazon may face similar challenges.

"Microsoft cited capacity constraints, and Google did the same. It’s likely that Amazon will acknowledge similar constraints, which could impact its expected growth rate," noted Bob O'Donnell, chief analyst at TECHnalysis Research.

Some analysts view the struggles of Microsoft and Google as a sign that Amazon has gained ground in the AI space. Amazon has ramped up investments in AI, including doubling its stake in Anthropic and expanding the AI models available on its cloud platform.

"We believe AWS is regaining market share. It had been lagging behind Microsoft Azure and Google Cloud in growth, but as Amazon strengthens its AI offerings, it may see a less significant slowdown than its rivals," said Gil Luria, an analyst at D.A. Davidson.

Amazon’s stock maintains a higher valuation than its competitors, with a forward price-to-earnings (P/E) ratio of nearly 39, compared to Microsoft’s 29 and Alphabet’s 22.4, according to LSEG data.

Beyond cloud computing, Amazon’s retail business is also expected to benefit from a strong holiday shopping season. Positive forecasts from major retailers like Target suggest solid consumer spending. Amazon’s North American sales for the fourth quarter are projected to rise 9% year-over-year, indicating a potential rebound in its e-commerce segment after a slowdown earlier in 2024.

Adobe Analytics data revealed that U.S. shoppers spent over $240 billion online between November and December 2024, with holiday sales growing 8.7%—nearly double the 4.9% growth rate in 2023—driven by significant discounts on various products.

Amazon’s efforts to enhance delivery speeds and expand its merchandise, particularly in grocery, pharmacy, and fashion, are expected to support its growth trajectory.

"All indications point to a strong quarter for Amazon. The holiday shopping season was favorable for consumers, making it likely that Amazon’s retail business performed well," Luria added.