Economic Uncertainty Weighs on Cloud-Computing Divisions at Amazon and Microsoft

Demand for highly profitable cloud-computing services has slowed as businesses cut spending due to economic uncertainty.  As a result, earnings for Amazon.com (AMZN) and Microsoft (MSFT) may be affected when they report their quarterly results next week.  Analysts are projecting the slowest revenue growth for both companies’ cloud-computing businesses since their startups in 2006.

Robust demand for cloud-computing services has been a steady growth driver for both Amazon and Microsoft. However, some analysts are concerned that the weakness in the companies’ cloud-service businesses is not reflected in their share prices.  Robert Baird said not much of the cloud weakness is priced into the stocks that are up 20% or more this year and that “given how much they’ve run, the setup for earnings is horrible.”   

The cloud businesses of Amazon and Microsoft are critical for the performance of both companies. Amazon Web Services was Amazon.com’s fastest-growing segment last year and generated $22.8 billion in operating income.  The rest of Amazon’s businesses combined posted a $10.6 billion operating loss. Microsoft’s Intelligent Cloud unit, home to its Azure cloud services business, accounted for 38% of the company’s revenue and 39% of its operating income in 2022.

With the economy weakening, cracks are beginning to appear in the growth of the cloud-service businesses of both companies.  Q1 growth in Amazon’s Web Services is projected to fall -14% after climbing +37% in the same period last year.  Also, Q1 growth in Microsoft’s Azure unit is projected to decline -31% after expanding by +49% in the same quarter last year.  In a letter to shareholders last week, Amazon said its Web Services “faces short-term headwinds” related to the economic backdrop that will “soften” the growth rate.  Microsoft also warned of a slowdown in cloud software sales last quarter.

Some analysts are growing more cautious about growth for both companies.  Last week, UBS cut its growth estimates for Microsoft’s Azure and warned that “customer efforts to optimize/trim their cloud spending will be deeper and longer than most think.”  Also, Jeffries sees slowing cloud demand as “a key concern” for Amazon. However, MAPsignals expects the recent downturn to be temporary before growth re-accelerates, saying, “There’s still a lot of runway ahead for cloud computing, so we don’t think investors should obsess too much over the level of growth over a couple quarters.”

On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.