Amazon’s Cloud Miss May Be Even Worse Than You Think (but It Makes Sense)

Anyone keeping a close eye on Amazon (AMZN -1.65%) these days certainly already knows the company’s fourth-quarter cloud computing revenue fell just short of analyst estimates, marking the second consecutive quarterly miss for its cloud arm. That disappointment paired with lackluster guidance for the quarter now underway sent shares tumbling on Friday last week, just two days after they reached a record high. Investors seem afraid that the e-commerce giant’s cloud business isn’t going to remain the cash cow it was believed to be just a few months ago.

The thing is, the crowd may be right. Not only is Amazon Web Services (AWS) now coming up short of expectations, but it’s losing cloud computing market share as well. Margin-crimping discounts may be inevitable in the near future.

There’s no denying the headwind now

As the chart below shows, Amazon Web Services’ share of worldwide cloud revenue has been steadily dwindling since 2019, reaching a record low of 30% last quarter. Microsoft (MSFT -0.58%) and Alphabet‘s (GOOG -0.88%) (GOOGL -0.92%) Google are responsible for most of this attrition, although a collective of smaller names like CoreWeave, Oracle (ORCL -2.81%), and Cloudflare (NET 0.16%) are suddenly coming on strong.

Data source: Synergy Research Group. Chart by author.

It’s not the end of the world for Amazon — at least not yet. The cloud computing industry’s total revenue grew 22% year over year in 2024, according to Synergy Research Group, and will certainly continue growing at a similar pace for at least the next several years. That’s enough tailwind to benefit all the names in the business including any that are losing market share.

It’s also worth adding that Amazon Web Services doesn’t appear to be in any immediate operational trouble. AWS’ operating profit margin rates remain around 37% after bouncing back from inflation-riddled 2022’s lull.

Data source: Amazon Chart by author. Revenue, income, and cost figures are in billions.

Make no mistake though. Now that cloud computing services have become commoditized, the most viable way to gain or regain market share is with more competitive (read “lower”) pricing. That, or a superior service that costs more to offer. Either way, don’t be surprised to start seeing Amazon’s cloud profit margin rates start shrinking in the foreseeable future.

It matters simply because while AWS only makes up 17% of Amazon’s top line, it accounts for 58% of its total operating income.

Reason for caution

Sure, it’s possible Amazon could start winning cloud market share again without sacrificing profitability. Anything’s possible.

That’s not a particularly reasonable hope at this time, however, in light of some eye-popping data.

Simply put, after years of unchecked price increases not accompanied by more features or additional functionality, cloud customers are measurably frustrated. A recent survey of over 500 cloud computing professionals (performed by alternative cloud service provider Civo) indicates that 37% of this crowd feels the cloud hasn’t lived up to its initial promise regarding cost-effectiveness. The same proportion is even “considering a move to alternative infrastructures” like building their own data centers or shopping around for options that better suit their unique needs without charging for options they don’t need. This includes canceling plans with one of the industry’s big three providers — AWS, Google, and Microsoft — and signing on with one of the smaller specialists that would qualify as an “other” on the chart above.

It’s perhaps the remainder of these cloud computing captains that paints an even more alarming picture of the looming price war AWS could soon be waging. Civo’s survey adds that over 80% of all enterprises are now thinking quite carefully about their cloud spending, yet 40% of them have yet to take any actual cost-reducing action. Once they do so in earnest, expect Amazon’s cloud margins to come under some real pressure.

What do Amazon investors do?

It’s not yet a reason to shed your Amazon shares. Even a weakened Amazon is still a more promising prospect than plenty of other stocks. It also merits mentioning that Amazon’s e-commerce arm — while not enormous profit centers compared to AWS — is increasingly more profitable now than it has ever been. Much of Amazon stock’s rich valuation has been rooted in its cloud computing business’s potential profits though. Now that this potential is in question, shares could struggle as the market rethinks what that ticker’s worth.

In other words, interested investors might want to let the post-earnings dust fully settle before diving in.