Potential Rival Poses Threat to Amazon’s AWS Dominance

If you possess an investment in Amazon (NASDAQ: AMZN), the likelihood is high that its rapidly expanding cloud computing division is the main reason you do. Even though Amazon Web Services (AWS) might only make up 15% of the organization’s overall income, Amazon’s cloud business accounts for two-thirds of the company’s operating earnings. Moreover, last year, AWS’ sales improved by 13%, boosting this division’s operating revenue by more than 15%. Quite impressive indeed.

However, if you believe Amazon’s cloud computing business is impregnable, think again. Microsoft (NASDAQ: MSFT) is gaining ground and narrowing the gap between the two companies’ cloud computing market share. Amazon cannot afford to allow this competitor to continue unchallenged. Or, possibly AWS is not capable of preventing it.

The cloud computing competition is intensifying

Do not misunderstand the situation. There is still an abundance of cloud computing business to go around. Data from Synergy Research Group indicates global cloud infrastructure spending increased by 20% year over year in the last quarter, capping off a similarly strong full year. Amazon remains the leader in the market as well.

Nonetheless, Amazon’s market share is diminishing, whereas Microsoft’s segment of the cloud computing market is evidently growing at a much quicker pace. The following graphic tells the story.

This is not catastrophic for Amazon, at least not yet. As mentioned earlier, AWS experienced substantial revenue and profit growth in 2023. It’s just that Microsoft is currently doing significantly better in this area. Its cloud revenue rose by 20% year over year for the three-month period ending in December, reflecting the unit’s forward fiscal progress during the previous quarter.

Considering several years of this growth discrepancy, the threat to Amazon’s cloud business is becoming a much larger concern in hindsight.

Why Microsoft is gaining on AWS

What is responsible for this situation? How is Microsoft managing to outperform Amazon in an industry that Amazon essentially pioneered?

A large proportion of the credit should be attributed to Microsoft’s cloud-computing technology, particularly its Azure platform. In basic terms, Azure is a platform that enables Microsoft’s cloud computing customers to access numerous cloud management tools in one interface. Enterprises do not have to use Azure; however, most customers voluntarily pay for the option due to its ease of use and affordability.

For the record, AWS provides a comparable interface for its users. However, it is not the same.

Then there is the other, arguably more significant distinguishing factor. Although both companies are capable of offering such technology, organizations looking to create artificial intelligence tools appear to prefer Microsoft to Amazon.

This should not come as a complete surprise. The artificial intelligence developer, Open AI, licensed its GPT-3 technology to Microsoft as far back as 2020, well before the chat-capable platform propelled artificial intelligence to the center stage. Microsoft’s earmarking of $13 billion worth of current and future investments in OpenAI in 2023 only further solidifies the relationship. The duo is quickly becoming the go-to provider for AI solutions, even when customers do not entirely know what it is they want to achieve with AI, or how to do it.

AWS simply does not possess the same AI advantage.

And this presents a profitability issue for the e-commerce giant.

As could have been expected, AWS’ profits — and profit margins — expanded as the business grew during the early part of 2022. Then inflation took hold, constraining those profits. This pressure has subsided since the latter part of last year. Nonetheless, the bottom line is stabilizing, and it is arguable that even Amazon’s cloud computing revenue growth is decelerating.

For the time being, Microsoft appears to be the better cloud choice.

It is not that Amazon is not worth holding at this point. Nevertheless, it would be naive to ignore the threat facing its primary business. If you are looking to invest in cloud computing but have room for only one option in your portfolio right now, Microsoft is arguably the superior choice until AWS demonstrates it can withstand the industry’s second-largest player.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

Amazon May Want to Watch Out for This Faster-Growing AWS Competitor was originally published by The Motley Fool.

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