Did Oracle Just Explain Why Amazon's Cloud Business, AWS, Has Lost Its Luster?

For many years, Amazon's (AMZN 3.43%) main breadwinner hasn't been e-commerce but rather its pioneering work in cloud computing, the Amazon Web Services (AWS) segment. But after more than a decade of rapid expansion, AWS has fallen on hard times -- or at least what can be considered "hard times" for the cloud market. Amazon's star player has been losing serious steam due to a slowing economy and customers tightening their financial belts. 

But there could be more to the story. Software giant Oracle (ORCL 2.02%) saw some resurgence this past year, and co-founder and CTO Larry Ellison said Oracle is winning over AWS customers. Is Amazon in trouble? 

A boss battle in the cloud

Amazon reported Q1 2023 earnings back in April, so let's get a quick refresh on the AWS outlook. Revenue from the cloud giant was up 16% year over year to $21.4 billion, half the growth rate being reported in early 2022. Still, not too shabby for a company hauling in more than $85 billion in annualized sales.  

Nevertheless, Amazon CFO Brian Olavsky said AWS growth rates were falling further in April, down to about an 11% year-over-year expansion pace. Olavsky said that "customers continue to evaluate ways to optimize their cloud spending in response to these tough economic conditions."

This stands in stark contrast to Oracle's building cloud momentum. Oracle Cloud is diminutive in size compared to AWS, and it was overlooked for years -- until now. In late 2022, Oracle was the first cloud provider to announce its purchase of Nvidia's (NVDA 6.18%) latest and greatest chips used in artificial intelligence (AI) training. Then in March, Oracle followed that up with the announcement that it would be the first to offer DGX Cloud, Nvidia's AI training subscription service. Is this just AI hype? 

Ellison says no. Many cloud workloads are purchased on a usage basis, and Oracle Cloud's plug-in of Nvidia hardware has led to some serious performance upgrades over AWS -- enough that Oracle Cloud can get the same workloads done in half the time or less. For a usage-based pay model, that performance upgrade equates to cost savings for customers.

Excluding the bump Oracle got from the acquisition of healthcare software giant Cerner last year, Oracle Cloud is accelerating while AWS is slumping. Suddenly, Amazon AWS's woes look more than just macroeconomic in nature. Perhaps Oracle is real competition worth monitoring.

Data source: Amazon and Oracle. *Oracle's latest fiscal quarter most closely aligns with Q1 of calendar year 2023. YOY = Year-over-year.

Amazon says there's room for everyone

Of course, Amazon CEO Andy Jassy said AWS is far from toast. Though the cloud leader looks a bit behind the curve in implementing high-end graphics processing units (GPUs), AWS has responded to Oracle's move. In late March, not long before Amazon's quarterly earnings update, AWS finally announced it is also plugging Nvidia GPUs into its architecture.  Jassy explained:

But we're not close to being done inventing in AWS. Our recent announcement on large language models and generative AI, and the chips and managed services associated with them, is another recent example. And in my opinion, 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.

Besides just tapping Nvidia, AWS has also been developing some of its own custom chips to help customers with their AI aspirations. And with cloud potential still in the early innings (upward of 90% of the nearly $5 trillion in annual IT spending is on legacy on-premises computing, not cloud), Jassy says there's still a long runway ahead of AWS.

If Amazon can right the ship and return to accelerated growth later in 2023 or in 2024, this is still a great cloud business to own for the long haul. But investors need to pay more attention to Oracle Cloud when discussing the "cloud giants."