The advent of cloud computing was a pivotal moment in technology. Giving companies the ability to create apps, rent computing power, and lease and access software -- all with nothing more than an internet connection -- was a game changer and helped kick off the digital transformation.
One of the pioneers of cloud infrastructure services was Amazon (AMZN -1.27%). When the company formally launched Amazon Web Services (AWS) in 2006, it set off a race among the world's biggest technology titans to offer cloud computing services.
Amazon has always been -- and continues to be -- the undisputed leader in the space, but its recent results have investors wondering whether the tide may be turning, putting the company's biggest moneymaker at risk.
Image source: Getty Images.
Forecast: Cloudy
When Amazon reported its first-quarter results last week, one of the most eye-catching developments was the notable slowing in growth of its cloud infrastructure segment. AWS generated revenue of roughly $21 billion, an increase of 16% year over year. For context, AWS revenue climbed 36% in the prior-year period and its expansion has slowed with each passing quarter. A deceleration of this magnitude shouldn't be taken lightly, as this marked the slowest rate of growth since Amazon first started breaking out the results for its cloud business back in 2014.
What's more, this takes on added significance when considered against the backdrop of Amazon's overall results. The evidence clearly shows that cloud computing is the company's most important business. In 2022, AWS generated more than 15% of Amazon's net sales and all of its operating income -- even subsidizing its North American and international e-commerce businesses. This isn't an unusual occurrence for Amazon; the cloud infrastructure business has been its biggest profit generator for years.
Taking a step back
While the results appear concerning at first glance, it's important to put these numbers in context. Macroeconomic conditions have caused a broad pullback in cloud growth as businesses cut spending in response to the current economic climate.
In its fiscal third quarter (which ended March 31), Microsoft (MSFT -0.49%) Azure grew 27% year over year, slowing from 46% growth in the prior-year period. Alphabet's (GOOGL 0.97%) (GOOG 0.89%) Google Cloud also felt the pinch, up 28% year over year after generating 44% growth in the year-ago quarter.
A look at the overall market suggests things haven't changed that much. Worldwide cloud infrastructure spending grew 20% year over year in the first quarter, according to data compiled by Synergy Research Group. At the same time, Amazon controlled 32% of the market, followed by 23% for Microsoft Azure, and 10% for Google Cloud. During the same quarter last year, Amazon had a 33% market share, followed by Azure with 22%, and Google with 10%.
This illustrates that while AWS did cede a bit of its market share -- roughly 1 percentage point -- to Azure, it's still far too early to draw any conclusions.
Is the worst over?
There could be more pain ahead for the cloud unit. On the earnings call, CFO Brian Olsavsky noted that year-over-year cloud growth in April was about 5% "lower than what we saw in Q1," as customers sought to "optimize their cloud spending in response to these tough economic conditions in the first quarter."
On a more upbeat note, Olsavsky went on to say that "few folks appreciate how much new cloud business will happen over the next several years from the pending deluge of machine learning that's coming."
There are a number of reasons Amazon's cloud market share has slipped. It may be that some of its customers are more sensitive to the current economic conditions. It's also possible that Microsoft caught a temporary tailwind from all the gains in generative AI and its $13 billion investment in ChatGPT parent OpenAI.
So while the situation at AWS certainly bears watching, it's still too early to sound the alarm.
