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AWS Slowdown Won't Slow Down Amazon Shares

By Adria Cimino - Feb 3, 2020 at 10:55AM

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Amazon Web Service growth has slowed but the cloud business still is part of the forces lifting Amazon shares skyward.

Slowing growth in's (AMZN 3.58%) cloud computing business didn't stop Amazon shares from soaring after the company's earnings report and pushing market value to the $1 trillion mark. Though net sales growth at Amazon Web Services (AWS) slowed to 34% in the fourth quarter from 35% growth in the third quarter and 37% in the second, investors wisely put this into perspective and chose not to sanction the stock.

An IT specialist stands in a data center.

Image source: Getty Images.

Why are investors right to shrug off the news? First of all, the size of the slowdown isn't alarming, and AWS net revenue of $9.95 billion still came in ahead of a Factset forecast for $9.81 billion. And at the same time, AWS is aggressively expanding what it has to offer. That means higher costs now but more revenue later. Among various new features, AWS announced machine learning-powered analytics capabilities that help businesses spot and understand customer issues and trends. AWS also launched initiatives to advance quantum computing technologies with a service that allows professionals to experiment with computers from quantum hardware providers in one place. And five new artificial-intelligence services are meant to put machine learning in the hands of more developers.

Important profit driver

Operating expenses have climbed from quarter to quarter at AWS, this time increasing 40%, but AWS still posted $2.6 billion in operating income. Another reason to be confident: The business represents an important profit driver for Amazon, with AWS operating income making up 67% of the entire company's $3.9 billion in operating income for the quarter. Amazon's net income totaled $3.3 billion, a 10% increase year over year.

Of course, AWS still faces challenges like competition that could weigh on revenue. For example, the service, seen as a favorite to win a massive cloud computing contract with the U.S. government, lost out to rival Microsoft (MSFT 3.42%) this fall. AWS appealed the Pentagon's decision, and according to press reports, just recently asked a court to halt its rival's work on the $10 billion Joint Enterprise Defense Infrastructure (JEDI) project. Investors will want to keep an eye on developments there, but it is unlikely that even a definitive loss of the JEDI project would profoundly hurt AWS and therefore Amazon.

Beyond AWS, a few other points stood out in Amazon's earnings report, and they are encouraging because they show growth throughout the retailer's businesses.

The star of the quarter

Prime membership is a big star of this quarter's earnings report. Amazon said that more people joined Prime during the quarter than ever before, and membership now stands at more than 150 million paying members globally. Subscription services revenue, which includes Prime membership fees among other Amazon services, climbed 32% in the quarter to $5.24 billion. For an annual fee of $119, Prime offers members free delivery on many items as well as other benefits such as access to movies and books. New this quarter, Amazon rolled out free grocery delivery to Prime members through its Amazon Fresh service as it seeks to beat grocery rivals like Walmart (WMT 0.08%). Prior to this, customers had to pay a $14.99 monthly fee for delivery. Amazon's delivery efforts are paying off; the company said grocery delivery orders from Amazon Fresh and Whole Foods Market more than doubled in the quarter compared to the same period a year ago.

Another bit of interesting news involves Amazon's expansion into the automobile industry with the integration of its virtual assistant Alexa into cars. Fiat Chrysler (FCAU) is adding Alexa to the infotainment system for its cars, while Lamborghini will include Alexa in its Huracan Evo range. And speaking of Alexa, Amazon now counts the number of Alexa-enabled devices owned by customers in the hundreds of millions.

Looking into the future

As for first-quarter 2020 guidance, Amazon expects operating income between $3 billion and $4.2 billion, which is lower than operating income in the year-earlier period. The revenue picture looks brighter though, with Amazon predicting net sales to climb between 16% and 22% to as high as $73 billion. Overall, it's an earnings report that should please investors and encourage new ones to buy the shares. Even though Amazon's price-to-earnings ratio of about 82 might seem hefty, a look into the past shows the company has actually been trading around pre-2013 lows in terms of valuation. Wall Street is bullish, forecasting 17% upside for the shares. Considering these factors and recent and expected sales growth, the best Amazon deal at the moment may be Amazon shares.

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