The competitive picture for Amazon (AMZN) is getting harder, mainly in AWS cloud computing. Amazon is close to its supply limits right now. There is only so much compute it can supply. Because of that, many developers are moving to Microsoft's (MSFT) cloud platforms instead of Amazon's or Google's. Developer uptake of Microsoft's cloud has risen strongly. This is a supply problem, not a demand problem. Microsoft simply has more compute available for companies and developers to use.
Amazon still leads both e-commerce and cloud, and I expect it to stay the leader. It has been one of the best companies in the world for a long time. Buying the dip at almost any point over the last 25 years has paid off. With the stock down 13% from its highs, this looks like a good opportunity. Many of these stocks got ahead of themselves during the AI buildout race, so prices are now correcting back toward the mean. Amazon looks fairly priced in the short term, but long-term it is one of the best companies in the world. Buying a 13% dip off all-time highs every time it happened would have left an investor in a good spot over the past two decades, and I think that holds going forward. Amazon is one of the rare companies that gives exposure to both consumer demand, which I see staying strong, and the AI arms race, which I also see staying strong despite recent headlines.
Cloud growth rates
Recent cloud growth rates: Alphabet/Google (GOOGL) grew 82% year-over-year, though it ranks third. Microsoft (MSFT) beat expectations with growth above 40%. AWS grew about 39%, above the whisper number of about 35%. Keeping these growth rates will get harder going forward, partly because of capacity limits and partly because the competition is intensifying as more partnerships get signed.
The battle is on, and that is good news for developers and for companies adopting AI, because strong competition and heavy buildout should ease supply limits and give customers better pricing. The open question is whether AWS can hold its profit margins in this more competitive market.
One key point: a flat line in AWS consumer demand does not mean a flat line in revenue. Existing customers can keep using more and more - they can use as much compute as Amazon can give them. So a flat demand line, when you are the leader in a growing space and clients are spending as much as they can, is actually good news. Microsoft is doing a strong job picking up the slack and showing strong growth, but Amazon remains the first choice for most customers on both the AWS and e-commerce sides. It is their game to lose.
What AWS must do
On share performance, Alphabet/Google (GOOGL) is still beating both Amazon (AMZN) and Microsoft (MSFT), and Microsoft has been playing catch-up recently.
To hold its position and take back share, AWS has to keep that 35% growth rate - that is the line in the sand - and prove it can do so at very high gross margins. If it manages that, the upside is large. A common fear is that in this competitive environment Amazon cannot keep those margins or that growth rate forever. That fear is fair until you factor in how much more compute people will use because of what AI offers.
This comes down to your view on AI overall. If you think the buildouts will create too much supply - meaning AI spending and growth will slow - then Amazon is a tricky bet, at least short-term. If you think, as I do, that AI computing demand will only grow and accelerate from here, then all three companies - Alphabet (GOOGL), Microsoft (MSFT), and Amazon (AMZN) - have considerable upside.
One striking stat: Amazon's stake in Anthropic would rank larger than many S&P 500 companies by market cap and enterprise value. That bet alone is bigger than a lot of S&P 500 companies. So Amazon has a lot riding on AI, and I think it is well positioned, with the tailwind continuing and accelerating. The market is cautious right now, which is understandable, but I disagree with that caution.
The full business
AWS is now Amazon's biggest profit maker, so it overshadows the rest, but the other segments are doing well too. Amazon announced Prime days in early October. Retail, advertising, and subscription services are all performing well.
For most investors, the default position on Amazon should be to hit the buy button. That has worked for multiple decades. Amazon has executed against opportunities as well as any company in history, with no sign of that stopping. I like investing in companies I enjoy being a customer of, and Amazon has earned the benefit of the doubt on its ability to execute in the future.
