Amazon's (AMZN 1.30%) crown jewel suddenly looks tarnished.
Amazon Web Services, the cloud infrastructure juggernaut that has carried the stock for much of the last decade, posted its slowest growth ever in the fourth quarter.
Revenue growth at AWS came in at just 20% in the quarter, a marked deceleration from 27% growth in the third quarter and 40% in Q4 2021. That slowdown wasn't entirely unexpected, as CFO Brian Olsavsky had warned about headwinds in AWS on the third-quarter earnings call, and the company's guidance called for just 2% to 8% overall revenue growth in Q4, implying challenges in AWS.
Overall, Amazon's Q4 revenue rose 9% to $149.2 billion, beating estimates of $145.2 billion. On the bottom line, the company reported generally accepted accounting principles (GAAP) earnings per share of $0.03, which includes a mark-to-market loss on its investment in Rivian. The analyst consensus was $0.17 in EPS.
Guidance was also modest, with the company calling for revenue growth of 4% to 8% in the first quarter.
Amazon shares drifted lower in after-hours trading Thursday, down 5%, as the results and guidance were a far cry from the fast-growing tech giant of old.
Image source: Getty Images.
Trouble in paradise
For years, Amazon Web Services delighted Wall Street with breakout growth and sky-high margins, but the fourth-quarter earnings report shows that those days could be coming to an end. Not only did revenue grow just 20% to $21.4 billion, but operating income actually declined from the quarter a year ago, falling 2% to $5.2 billion, which was its lowest profit since Q3 2021. On a constant-currency basis, operating income was down 10%, and operating margin in AWS fell to 24.3%, its lowest since 2017.
On the earnings call, management said that AWS's growth would be even slower in the first quarter, up just mid-teens quarter to date. CFO Brian Olsavsky added that AWS customers have been focused on optimizing costs due to macroeconomic challenges, and that has impacted the growth rate of its cloud business.
Notably, AWS's growth rate also lagged behind its closest rivals, Microsoft Azure and Alphabet's Google Cloud, showing that it's losing market share. Google Cloud revenue grew 32% to $7.3 billion, while Azure's revenue rose 31% in Microsoft's quarter ended in December.
With AWS slowing down, investors would like to see better results from the e-commerce segment, but that side of the business is even more disappointing. In its non-AWS segments, which are primarily made up of e-commerce, the company lost $2.5 billion in the quarter, even though Q4 is the strongest seasonally in e-commerce. It posted an operating loss of $10.6 billion for the year outside of AWS.
On the call, management explained that it doubled its fulfillment network in just a couple of years, and it had added the equivalent of a UPS in delivery capabilities to keep up with demand during the pandemic. It essentially said that it would take time to make those networks efficient, and Amazon has already acknowledged that it over expanded during the pandemic in anticipation that the pandemic demand trend would continue, which did not happen.
Is this a red flag for Amazon?
Even as its fourth-quarter numbers disappointed, Amazon still enjoys a number of competitive advantages, including its Prime loyalty program, its third-party marketplace, its logistics network, and AWS, which continues to generate strong profits.
However, it's clear that even after the company laid off 18,000 corporate employees, management has more work to do to streamline its costs and drive profitable growth. The company posted operating income of $12.2 billion for 2022, and revenue grew just 9% for the year.
For a company valued at over $1 trillion, or nearly 100 times operating income, those numbers don't add up, and few companies not named Amazon would receive such a high multiple from Wall Street with that kind of growth and profitability.
Investors seem confident that the company will return to stronger growth on the top and bottom lines once the economy improves, but there's likely to be a ceiling on the stock until it does, especially after shares rallied 40% in just a few weeks heading into the report.
With the AWS growth story running out of steam and e-commerce losing billions each quarter, Amazon's fundamentals look weaker than they have in a long time. Given its track record, Amazon deserves the benefit of the doubt for now, but if the business continues to stagnate, Amazon stock could easily give up its recent gains and then some.
