Amazon announced its third quarter results and revenue in Amazon Web Services (AWS) grew by 35%. AWS is undoubtedly the leader in the cloud and a significant driver of growth and profits for Amazon in the last five years. However, its growth in the third quarter is the slowest rate in at least five years. In its second quarter, AWS showed a noticeable slowdown in revenue and earnings growth, and fell short of the target expected by Wall Street. Amazon’s shares fell by 11% since that report, the largest decline among big tech companies, making Amazon to be one of the weakest big tech stocks for the year.
AWS provides storage, computing and networking tools for companies that use its services to run a wide variety of applications. This tech company, which was launched in 2006, dominates the cloud business, leading Microsoft, Google, Alibaba, IBM and Oracle. It ended the 3rd quarter with $9 billion in revenue, short of the $9.1 billion predicted by analysts, with a growth rate lower than the 37% in the second quarter. It continues to grow at a faster rate than its parent company which had an overall growth of 24%. However, Azure (owned by Microsoft and its largest competitor) reported a 59% revenue growth in the third quarter and that is worrisome for Amazon investors.
Amazon Web Services’ results affected the whole of Amazon’s results negatively, resulting in earnings that were lower than predicted by analysts. In the last four years, it contributed most of Amazon’s operating income. In the third quarter of 2019, it contributed $2.26 billion operating income which is 8.9% higher than the 3rd quarter in 2018. But the operating income is lower than the estimated $2.55 billion and the growth rate of 8.9% is the slowest rate in four and half years.
AWS contributed 13% of Amazon’s total revenue and 71% of its total operating income. Stifel analysts wrote to their clients, “Costs associated with building AWS marketing teams and greater infrastructure spending, relative to the prior year, will continue to work against margin in the back half of the year. We expect AWS margin, which fluctuates from quarter-to-quarter, will be down y/y due to investment.”
Recently, AWS opened a number of Bahrain data centers for customer use and acquired E8, a start-up company. Wall Street is already anticipating a bargain since Amazon is one of the S&P 500 stocks that have an undisputed “buy” rating from analysts. Why not! Amazon shares are around 68 times forward earnings and therefore look cheap compared to stocks that have averaged several hundred times forward earnings in the past four years. That’s not all. Amazon has managed to maintain a strong valuation by giving investors a huge scaled up business growing at over 20% annually and an expanding profit. AWS is a major contributor to those expanding profits as the retail side absorbs the costs of own deliveries and single day deliveries. Despite its challenges, Amazon is still far ahead of its cloud challengers but AWS cannot afford another slip.