Will AWS be able to maintain its lead against Microsoft and Google in the cloud market?

The stock of Amazon soared at the beginning of this month, surging 11% in just two days due to better-than-anticipated earnings and sales. The outcomes put the spotlight on the e-commerce giant’s evolution into an enterprise tech juggernaut, outstripping companies such as Microsoft (MSFT), Alphabet (GOOGL), and IBM.

buy just about everything. As the e-commerce giant expands its artificial intelligence capabilities, the company is working on new initiatives to help customers do way more than just shop for everyday items. These developments come as e-commerce revenue, which surged during the pandemic, is not generating the high-level gains it once was. The tech behemoth is looking to write the next chapter of its growth story by continuing to invest in new areas and developing other business units.” vid-name=”Why Amazon Is Expanding Into Everything From AI To Auto” vid-cat=”Industry Insights” vid-date=”12/13/2023″ vid-date-tmsp=”1702464542″ vid-image=”https://www.investors.com/wp-content/uploads/2023/12/T5KuDpIj-640×360.jpg” vid-authors=”MEREDITH HEYMAN”>
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However, the earnings season also emphasized the troubling difficulties faced by Amazon Web Services, the company’s most lucrative business segment. Although AWS leads the cloud platform in the tech industry, it must contend with the swiftly growing trend of artificial intelligence, just like everyone else.

Even though Amazon’s cloud business expansion seems to be solidifying after being negatively affected by customers’ cutbacks in tech spending, the earnings season disclosed present perils. Its primary cloud rival, Microsoft, reinforced by an association with ChatGPT creator OpenAI, is transforming into a more formidable competitor due to its early advantage in AI. Google, the third-largest cloud services provider, is taking aggressive steps to enhance its formidable AI arsenal, recently launching what it markets as its most capable large language model to date. Additionally, both Microsoft and Google informed analysts during their recent earnings calls that they’re allocating more financial resources to AI.

Amazon remains the dominant force in the cloud based on market share. However, many analysts concur that when it comes to the cloud competition, AI is now a game-changer — and Amazon’s primary competitors, particularly Microsoft, have the initiative.

Amazon Stock: AI As ‘Pervasive Focus’

On Amazon’s February 1 earnings call, CEO Andy Jassy made it clear that the company should not be underestimated. Generative AI will generate “tens of billions of dollars” in revenue over the next several years, he explained. Jassy also seemed to push back against the notion that Microsoft is the go-to for AI.

Andy Jassy, CEO Amazon
Amazon CEO Andy Jassy (DFree/Shutterstock)

These developments signify that AI will revolutionize every application that we use at work and at home. “We’re ready to help you reinvent with generative AI,” said AWS Chief Executive Adam Selipsky at the Las Vegas event. 

AI Is Next Battlefront In Cloud

The AWS conference occurred approximately a year after ChatGPT’s launch. The OpenAI chatbot instigated a worldwide craze over generative AI, which turned the spotlight on AI as an essential business tool in the enterprise tech market. Now, analysts anticipate AI becoming the next contested arena in the already extensive cloud market.

“Gen AI technology alone requires enormous scale to operate — storage, compute, networking. All that infrastructure is really supported by a technology like the cloud,” informed Gartner analyst Sid Nag. “You cannot run that on-premise, or at least it’s very difficult.”

This demand for computing power might provide a new wave for cloud spending growth, which decreased in recent quarters as corporations reduced costs. Analysts and software heads described the trend as software buyers “optimizing” their computing needs. Gartner forecasted in November that companies will spend $679 billion on public cloud services this year, increasing by 20% from 2023. This includes spending on infrastructure-as-a-service (IaaS) and cloud-based software applications.

Big AI Spending

Simultaneously, cloud providers, including Amazon, are anticipated to invest more in AI capabilities, including procuring advanced chips and constructing more robust data centers. For instance, Amazon’s projected overall capex growth in 2024 is 12% to $59 billion. Microsoft and Google also communicated their intentions to boost capex in 2024, driven by AI-related investments.

Furthermore, the Big Three cloud computing companies are making substantial bets on startups for greater AI firepower. Investments from Microsoft, Google, and Amazon accounted for two-thirds of the $27 billion that AI-focused startups raised in 2023.

Microsoft, Google Lead On The AI Front

Amazon is distinctly dealing with formidable competitors in the AI battleground. Ultimately, the survey results indicate that Azure’s advantage is likely to increase over AWS,” UBS analyst Karl Keirstead penned 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 denotes an unforeseen turn in Amazon’s ascent as a cloud powerhouse. For investors, AWS has become possibly the most important component of a company that operates the world’s largest e-commerce website, the third-largest digital advertising business, a film studio, and Whole Foods, among other ventures.

Before Amazon’s Q4 report, Piper Sandler analyst Thomas Champion stated that 70% of the questions he received from investors pertained to AWS.

The reason is clear: AWS has been a profit-generating machine with AWS responsible for two-thirds of Amazon’s $37 billion in operating income in 2023, while also contributing 16% of the company’s sales.

However, AWS sales growth has slowed, with sales increasing by 13% in 2024 compared to 29% in 2022.

Microsoft Gains Market Share

Microsoft gained share this quarter with the advantage of algorithmic intelligence (AI), Nadella said on Microsoft’s earnings call. The company’s cloud-computing revenue rose 25% to $9.19 billion in the December quarter, surpassing estimates of $8.94 billion.

Amazon’s AI Response

In response, the company swiftly initiated its own AI counteroffensive. In September, Amazon reached an agreement to invest up to $4 billion in Anthropic, an OpenAI rival. In April, the company introduced Amazon Bedrock, a service that allows AWS users to create generative AI applications.

Cutting The Cost Of AI

Amazon might have an advantage in securing AI businesses if its efforts, especially its custom chips, can lower costs. Crucially, some companies may prefer to work with multiple data models as Amazon Bedrock allows.

Cloud AI Market: Not Winner-Take-All

In other words, AI does not have to be a winner-takes-all market in the cloud.

Amazon has its own large language model, Titan, but it has not powered a hit product like the ChatGPT chatbot.

Amazon’s Answer To GPT?

Meanwhile, Reuters and The Information reported in November that Amazon was working on a more powerful LLM, Olympus, to challenge OpenAI and Alphabet. Asked about Olympus in December, Selipsky said to “definitely expect to see multiple iterations of Amazon’s first-party models, which are already out there today under the Titan brand,” but added, “There’s not one model to rule them all. We want multiple models with different use cases.”

Is Amazon Stock A Buy?

Amazon stock holds a Relative Strength Rating of 93 out of a best-possible 99. It has an IBD Composite Rating of 96 out of a best-possible 99. But currently, the stock is not a buy. It’s extended from its last good entry, a bounce off its 10-week moving average in the week of January 12.

Amazon Stock Outlook

Amazon stock remains a top pick on Wall Street. But investors will be monitoring the competition for AI business, and it could be an extended battle.

Gartner’s Nag stated that, with respect to 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? 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 revenue.”

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