Amazon stock shot out of the gate this month, racing 11% higher in two days on better-than-expected earnings and sales. The results turned the spotlight on the e-commerce juggernaut's transformation into an enterprise tech powerhouse outgunning the likes of Microsoft, Google parent Alphabet and IBM.
But the earnings season also underscored the unsettling challenges faced by Amazon Web Services, which has been the company's most profitable business segment. AWS is the tech industry's dominant cloud platform. But AWS must grapple like everyone else with the fast-growing trend taking the industry by storm: artificial intelligence.
While growth of Amazon's cloud business appears to be firming after taking a hit from customers' tech spending cuts, the earnings season revealed dangers in its midst.
Its top cloud rival, Microsoft, boosted by an alliance with ChatGPT creator OpenAI, is turning into a more formidable competitor with its early lead in AI. Google, the No. 3 cloud services provider, is moving aggressively to beef up its formidable AI arsenal, recently launching what it touts as its most capable large language model yet. And both Microsoft and Google told analysts in their recent earnings calls that they're channeling more investment dollars to AI.
Amazon is still the cloud king based on market share. But many analysts agree: In the battle for the cloud, AI is now a game-changer — and Amazon's main competitors, particularly Microsoft, have the momentum.
"For Amazon, we are talking really being a matter of six months later than Microsoft," Chris Mack, information technology analyst and portfolio manager at Harding Loevner, told Investor's Business Daily. "That feels like an eternity with everything happening in the news for generative AI. Still, I don't think I would count Amazon out yet, as some seem tempted to do."
Amazon Stock: AI As 'Pervasive Focus'
Amazon Chief Executive Andy Jassy made clear on the company's Feb. 1 earnings call that Wall Street shouldn't count it out.
"Gen AI is and will continue to be an area of pervasive focus and investment across Amazon," said Jassy, who succeeded Amazon founder Jeff Bezos in 2021.
Generative AI will drive "tens of billions of dollars" in revenue in the next several years, he said. He appeared to push back on the narrative that Microsoft is the go-to for AI.
"We continue to see momentum around customers wanting to do their long-term Gen AI work with AWS," Jassy told analysts.
Jassy's comments affirmed Amazon's message at its AWS customer conference in November when the company laid out its AI game plan.
Amazon unveiled a new AI chatbot tool for businesses called Q. It highlighted its Bedrock offering, which allows companies to build products by plugging their own data into AI algorithms. AWS also introduced a new version of its Trainium computing chip optimized for AI and touted an expanded partnership with AI chip kingpin Nvidia.
Gen AI is "going to reinvent every application that we interact with at work and at home," AWS Chief Executive Adam Selipsky said in his keynote at the Las Vegas event. "We're ready to help you reinvent with generative AI."
AI Is Next Battlefront In Cloud
The AWS conference took place roughly a year after the launch of ChatGPT. The OpenAI chatbot triggered a worldwide craze over generative AI, software that enables users to create generally high-quality content, including images, videos and text. ChatGPT also turned the spotlight on AI as a critical business tool in the enterprise tech market.
Now, analysts expect AI to become the next battleground in the already massive cloud market. Gen AI applications require huge amounts of data to be crunched on hard-to-find specialized chips. To build these tools, companies need access to massive amounts of computing power. This is where the cloud giants are expected to play an important role.
"Gen AI technology by itself requires massive scale to operate — storage, compute, networking. All that infrastructure is really supported by a technology like the cloud," Gartner analyst Sid Nag told Investor's Business Daily. "You cannot run that on-premise, or at least it's very difficult."
That need for computing power could provide a new wind for cloud spending growth, which slowed in recent quarters as companies cut costs. Analysts and software chiefs described the trend as software buyers "optimizing" their computing needs.
Gartner projected in November that companies will spend $679 billion on public cloud services this year, up 20% from 2023. That includes spending on infrastructure-as-a-service, or IaaS, where businesses rent servers and data storage. It also includes spending on cloud-based software applications.
Big AI Spending
Meanwhile, cloud providers, including Amazon, are expected to invest more money in AI capabilities, including acquiring advanced chips and building more powerful data centers.
Wall Street projects Amazon's overall capital expenditures will rise 12% to $59 billion in 2024. Chief Financial Officer Brian Olsavsky told analysts Feb. 1 that capex increases will primarily support AWS growth.
But its cash-rich rivals have the same idea. Microsoft and Google both told analysts during recent earning calls to expect capex increases in 2024, driven by AI-related investments.
Cloud computing's Big Three are also making bold bets on startups in a bid for more AI firepower. Investments from Microsoft, Google and Amazon accounted for two-thirds of the $27 billion that AI-focused startups raised in 2023, according to PitchBook data reported by the Financial Times.
Microsoft, Google Lead On The AI Front
Amazon clearly faces tough challengers in the AI battlefield.
Microsoft was quicker to embrace generative AI, underlined by its reported $10 billion investment in OpenAI. The tech giant has integrated ChatGPT into its Microsoft Azure cloud-computing business. And its Copilot tool embedded AI functions throughout its Microsoft Office apps that are popular across enterprises, including Excel, Word and Teams.
Google, for its part, rolled out the AI chatbot called Bard. The company has long been known as a trailblazer in AI research. In April 2023, Google formed Google DeepMind, merging two of its major AI research divisions: DeepMind Technologies, which the company acquired for $500 million in 2014, and Google Brain. In December 2023, Google unveiled its Gemini generative AI model, designed to compete more directly with ChatGPT.
Where do the three competitors stand with customers right now? A poll of more than 100 enterprise software buyers by UBS analysts in December found that Microsoft Azure was the most popular option for companies currently running AI workloads, with 62% saying they are using the service. But AWS was only slightly behind, with 52%, indicating companies are using more than one provider. Further, 51% of respondents said they were most likely to use Azure for future generative AI projects, while 29% said the same for AWS.
"While expected, we should stop and reflect on the importance of that achievement — beating AWS at anything is incredibly tough," wrote UBS analyst Karl Keirstead in the report. "Going forward, the survey results suggest that Azure's advantage is likely to increase over AWS."
Why AWS Is Key To Amazon Stock
AI marks an unexpected twist in Amazon's rise as a cloud powerhouse.
The company grew rapidly to dominate e-commerce after the Dot-Com era. Amazon, which set up a network of data centers for its e-commerce business, played a critical role in pushing the trend that emerged after the Dot-Com crash: cloud computing. Big corporations, startups and mom-and-pop shops abandoned in-house data centers and servers and instead rented computing power online.
This trend helped Amazon morph into a major enterprise tech player, outmaneuvering not only Microsoft and Google but also the traditional giants of enterprise tech like IBM, Hewlett-Packard and Oracle.
For investors, AWS has become maybe the most important piece of a company that holds the world's largest e-commerce website, the third-largest digital advertising business, a film studio, Whole Foods and more.
Heading into Amazon's fourth-quarter report, Piper Sandler analyst Thomas Champion wrote in a client note that 70% of the questions he was hearing from investors were about AWS.
The reason is clear: AWS has been a profit-printing machine. In 2023, AWS was responsible for two-thirds of Amazon's $37 billion in operating income, while contributing 16% of the company's sales.
But AWS sales growth has slowed as companies have eased back on IT spending. For the full year, AWS posted a 13% increase in sales. That compared to annual sales growth of 29% in 2022, 37% in 2021 and 30% in 2020.
Pair that fact with concerns about the company's AI readiness, and it is more clear why investors spent last year "myopically focused" on AWS. That's how William Blair analyst Dylan Carden described it in a client note following Amazon's third-quarter earnings report in October.
Microsoft Gains Market Share
Amazon allayed some of these concerns with its fourth-quarter results. AWS sales grew 13% to $24.2 billion, in line with expectations. Importantly, year-over-year growth accelerated slightly from the 12% rate in the third quarter.
Analysts had noted that businesses were reining in their costs as they tried to optimize what they were spending on cloud services. But Jassy said that trend is fading.
The AWS growth "and commentary that growth is accelerating is welcome relief to investors," Bernstein analyst Mark Shmulik wrote in a client note.
But another trend also stood out from the earnings reports: The cloud businesses at Microsoft and Google appear to be growing faster. Microsoft said on Jan. 30 that Azure grew 30% year over year in the December quarter, with AI services providing a 6% lift.
On Microsoft's earnings call, Chief Executive Satya Nadella even declared that "Azure again took share this quarter with our AI advantage."
Google's cloud-computing revenue, meanwhile, rose 25% to $9.19 billion in the December quarter, topping estimates of $8.94 billion.
Amazon remains dominant, but its share of cloud-related spending slipped to 31% in December from 34% in October, according to Synergy Research Group. Microsoft's share ticked up two points to 24%.
In a client note, Barclays analyst Raimo Lenschow argued that "Microsoft's early-mover advantage in AI, coupled with its best-in-class platform of products, should continue to drive incremental share gains vs. AWS over the near and medium term."
Amazon's AI Response
Amazon moved quickly to try to counter Microsoft's advantage.
The company launched its own AI counteroffensive last year amid the frenzy over ChatGPT and Gen AI. In September, Amazon struck a deal to invest up to $4 billion in Anthropic, the OpenAI rival. With the Amazon investment, Anthropic turned to AWS as its primary cloud provider and for training its models using Amazon's chips.
In April, the tech giant launched Amazon Bedrock, a service that lets AWS users build generative AI applications. Instead of connecting clients to a single AI model, such as GPT, Amazon Bedrock offers AWS users access to a range of so-called foundation models from companies like Anthropic, Cohere and even Facebook-parent Meta.
On Amazon's earnings call, Chief Executive Jassy said "many thousands of customers" are using Bedrock. He also cited Airbnb and Snap among companies training algorithms using Amazon's AI chips.
Cutting The Cost Of AI
Amazon could have an advantage in winning AI businesses if its efforts — particularly its custom chips — can drive down costs.
Having a less powerful in-house AI model might not matter if Amazon can "deliver a gen-AI infrastructure data center at a lower cost than Microsoft, by virtue of their hardware expertise," Mack, of Harding Loevner, told IBD.
In fact, some companies may prefer to work with multiple data models as Amazon Bedrock allows.
"The key thing to understand about Bedrock is it is completely agnostic," Jordan Berger, an analyst with the research firm Third Bridge, told IBD. "That's different from Microsoft and Google."
Bedrock allows "developers to come in, use any kind of foundational model they want and build within their enterprise in a secure platform," Berger added.
Cloud AI Market: Not Winner-Take-All
In other words, AI does not have to be a winner-take-all market in the cloud.
The data orchestration startup Astronomer, for example, is finding different models can best serve different needs as it develops its generative AI products, according to Steven Hillion, Astronomer's senior vice president of data and AI.
"Just like it is nice to have more than one friend, it is nice to have more than one model you can call on to use," Hillion said.
Astronomer's Astro software, for instance, has launched a product designed to make it easier for companies to connect their so-called data pipelines with different large language models.
Amazon's Answer To GPT?
Amazon does have its own large language model, called Titan. But it hasn't powered a breakthrough product like the ChatGPT chatbot.
Meanwhile, Reuters and The Information reported in November that Amazon had a much more powerful LLM in the works, called Olympus, to challenge OpenAI and Alphabet.
Asked about Olympus in December, Selipsky told the Associated Press to "definitely expect to see multiple iterations of Amazon's first-party models, which are already out there today under the Titan brand."
But, he added, "There's not one model to rule them all. We want multiple models with different use cases."
Is Amazon Stock A Buy?
Of course, Amazon is a massive business. Analysts are also monitoring its progress in improving the margins of the retail business. Further, many observers are bullish on Amazon's growing advertising business.
The day after its fourth-quarter earnings report, Amazon stock surged 8% to 171.81. Shares are approaching a full recovery to their 2021 all-time high near 188 (adjusted for a 2022 stock split).
Amazon stock holds a Relative Strength Rating of 93 out of a best-possible 99, indicating the stock has outperformed most of the market over the past 12 months. It has an IBD Composite Rating of 96 out of a best-possible 99. The score means AMZN stock currently tops 96% of all other stocks, in terms of key fundamental performance metrics and technical strength.
But the stock is not a buy now based on technical analysis. It's extended from its last good entry, a bounce off its 10-week moving average in the week ended Jan. 12. (Learn more about how to buy stocks using technical analysis to identify the optimal time.)
Amazon Stock Outlook
Amazon stock remains a top pick on Wall Street. But investors will be watching the race for AI business. And it could be a long one.
Gartner's Nag noted that, when it comes AI, cloud companies are still in the "jockeying for position" phase.
"The ultimate test of this is going to be, how impactful is it for enterprises?" Nag said. "For enterprises to adopt AI, a host of other things will be important — privacy, ethics, sustainability, data sovereignty. That's what matters for enterprise adoption, which is where the cloud providers are going to see the revenue."
