Microsoft, Google cloud performance disappoints — what’s in store for Amazon?

Microsoft and Google’s underwhelming cloud performance has placed heightened scrutiny on Amazon’s upcoming fourth-quarter results, particularly regarding its cloud computing division and AI investments.

Market context: The technology sector has recently experienced volatility due to concerns about AI investment returns and emerging competition from lower-cost alternatives.

• Tech stocks surged over the past two years based on expectations of sustained AI-driven datacenter investments
• Chinese startup DeepSeek’s announcement of cost-effective AI breakthroughs triggered a selloff in technology stocks
• Microsoft and Meta faced pressure to defend their AI spending plans, while Google’s increased capital expenditure plans led to an 8% stock decline

Amazon’s competitive position: Amazon Web Services (AWS) appears better situated than competitors to navigate the evolving AI landscape.

• AWS, as the world’s largest cloud services provider, is projected to achieve its strongest revenue growth in eight quarters at 19.3%
• The company’s lower exposure to expensive large-language models provides some insulation from AI development costs
• Amazon became the first major cloud provider to integrate DeepSeek’s AI models
• The company plans to invest more than $75 billion in capital spending for 2024, primarily focused on AI infrastructure

Industry challenges: Cloud service providers are facing capacity constraints that could impact growth expectations.

• Both Microsoft Azure and Google Cloud reported capacity limitations in their recent earnings
• Analysts anticipate AWS may face similar constraints
• The company’s valuation remains higher than competitors, with a forward price-to-earnings ratio of 39, compared to Microsoft’s 29 and Alphabet’s 22.4

Retail performance: Amazon’s e-commerce division is expected to show strong results following a robust holiday shopping season.

• North American sales are forecasted to grow 9% year-over-year
• U.S. online holiday spending reached $240 billion, with growth accelerating to 8.7% from 4.9% in 2023
• The company’s improvements in delivery times and expansion into grocery, pharmacy, and fashion categories are expected to contribute to growth

Strategic implications: Amazon’s balanced approach to AI investment and cloud services, combined with its retail strength, could position the company for sustained growth despite industry headwinds.

• The company has strategically doubled its investment in Anthropic while maintaining a diverse portfolio of AI models
• Analysts suggest AWS may be regaining market share as it catches up in AI offerings
• This diversified strategy could help shield Amazon from the volatility affecting its tech peers