Microsoft and Alphabet Tuesday night reported cloud revenue ahead of analyst expectations. That raises the stakes for AMZN stock, as Amazon prepares to publish its quarterly earnings after close of market today.
Piper Sandler analyst Thomas Champion said "most investor focus" right now is on Amazon Web Services, the company's cloud-computing division. That's despite that the December-quarter is a big one for Amazon's massive online retail business. Investors want to see signs of reaccelerating sales growth for the division known as AWS.
"If we were to boil it down to one number, (roughly) 13% year over year would be the AWS growth 'bogey' and determine the outcome for the stock," Champion wrote in a client note Wednesday.
Amazon Web Services is the world's largest cloud services provider, followed by Microsoft's Azure and Alphabet's Google Cloud. While not as large by revenue as Amazon's e-commerce business, AWS is a key profit driver for the tech giant.
Investors have homed in on the performance of AWS in recent quarters, as sales growth has slowed. Further, Microsoft jumped out to what many see as an early lead in offering tools for generative artificial intelligence, through its partnership with ChatGPT creator OpenAI.
On the stock market today, Amazon stock rose nearly 1% to 156.85 at the opening bell. MSFT stock, meanwhile, was up more than 1% at 403.69 in recent action. Google shares also gained more than 1% to 142.33.
What Microsoft and Google Results Mean For Amazon Stock
On Wednesday, Microsoft and Alphabet shares closed lower despite results for their cloud divisions that topped expectations.
Microsoft said Tuesday that its Azure cloud business grew 30% year over year in its December quarter, exceeding the high end of its guidance. Chief Financial Officer Amy Hood told analysts that AI services provided a 6% lift to Azure sales in the quarter.
"Azure again took share this quarter with our AI advantage," Microsoft Chief Executive Satya Nadella said on the earnings call.
Further, Nadella said corporate customers are no longer solely focused on cutting, or optimizing, their cloud spending costs.
"That period of massive, I'll call it, 'optimization-only and no new workload starts,' I think has ended at this point," Nadella said.
A similar message came from Google. Chief Executive Sundar Pichai told analysts Tuesday that cost optimizations are "something we have mostly worked through."
Overall, Google said cloud-computing revenue rose 25% to $9.19 billion for the December quarter, topping estimates of $8.94 billion. The division also delivered $864 million in operating income. Google Cloud Platform lost $186 million in the same period in 2022.
"We're very pleased with the momentum of GCP with an increasing contribution from AI," Chief Financial Officer Ruth Porat said on the call.
On the other hand, analysts did take note of rising costs from AI efforts. In Google's case, Porat told analysts to expect "notably high capex" in 2024.
"To us, (this) gives off the impression that gen AI's capital intensity is catching management a bit off-guard," wrote RBC analyst Brad Erickson in a client note.
Expectations For AWS
Wedbush analyst Scott Devitt wrote Wednesday that he views "encouraging results for GCP and Azure as a positive readthrough for AWS." The analyst expects that AWS growth will accelerate this year against easier comparisons and "fading cost optimization headwinds."
In October, Amazon Chief Executive Andy Jassy told analysts that cloud optimizations were "attenuating," or lessening.
In its September-ending quarter, Amazon posted 12% year-over-year sales growth for AWS, compared with 27.5% growth in the third quarter of 2022.
For its December quarter, Amazon stock analysts expect AWS to post $24.2 billion in fourth-quarter revenue, according to FactSet. That would represent a 13.3% year-over-year increase.
Amazon Web Services is already larger than Azure and Google Cloud. So analysts are not expecting the Amazon to match the growth rate those companies published Tuesday. Instead, they are looking for signs of acceleration from AWS.
Amazon executives will also likely provide an update on generative AI efforts for AWS. The company in September agreed to invest up to $4 billion in OpenAI rival Anthropic. It also announced a range of new Gen AI products at a customer conference in November.
Whether Microsoft's results tell anything about AWS may depend on whether Amazon has closed the gap for AI business.
"On the surface, the fact that Microsoft posted a 1-point Azure growth rate beat and pointed to stable Azure growth in March is a good read-through to AWS," wrote UBS analyst Karl Keirstead in a Wednesday client note. "Yet, if much of the Azure upside is coming from AI revenues, then the read-through to AWS might be only modestly positive."
Meanwhile, Stifel analyst Brad Reback wrote in a client note Wednesday that Microsoft's and Google's results point to an improving overall environment for consumption-based software sales.
The "final piece in this week's puzzle," he said, will be Amazon's results.
