Amazon's (AMZN -0.63%) had a bit of a change of heart when it comes to making equity investments in hot start-ups.
Microsoft (NASDAQ: MSFT) invested $10 billion in OpenAI last year and partnered with the company to boost its cloud business. Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) built on its artificial intelligence (AI) capabilities to launch its own large language model earlier this year. Amazon, meanwhile, has fallen behind in generative AI.
So, the cloud computing leader invested in Anthropic, one of OpenAI's biggest rivals. In exchange for its commitment of up to $4 billion, Amazon is now the preferred cloud partner for Anthropic. Amazon Web Services (AWS) hasn't had to make these deals in the past, but with the rapid growth in AI over the last 12 months, it needs a mutually beneficial partnership like this one.
Where is all the cloud growth?
Through the first half of 2023, AWS has seen net sales growth slow to the mid-teens. Meanwhile, rivals Microsoft and Google are growing in the high-20% range.
It's not necessarily a surprise that the biggest company in the space is the slowest-growing on a percentage basis. The law of large numbers is real.
But Amazon's absolute growth doesn't inspire a lot of confidence. Sales are up $5.3 billion in the first half of the year compared to 2022 for Amazon. Google Cloud revenue is up $3.4 billion despite sitting at roughly one-third the size. For reference, AWS is nearly three times the size of Google Cloud. (Microsoft doesn't release exact numbers for Azure, its cloud computing segment.)
Amazon's rivals are telling a much different story when it comes to their cloud computing results.
Alphabet's management continually pointed to the effect of companies using AI on its cloud infrastructure as a significant driver of revenue during the second quarter. Likewise, Microsoft pointed to how nearly 100 new customers signed up to use OpenAI services on Azure every day in its fiscal fourth quarter, and it's drawing existing customers to spend more. Meanwhile, Amazon's management led by talking about how it's helping customers optimize their cloud spending during its Q2 earnings call.
Can Anthropic turn things around?
As part of its agreement to invest up to $4 billion in Anthropic, AWS is getting a big customer.
Anthropic will use AWS to train its large language model, which requires significant compute power. On top of that, it'll switch to using Amazon's Trainium and Inferentia chip designs announced earlier this summer. Additionally, Anthropic's AI assistant, Claude, is now available on Amazon Bedrock, the company's platform for building generative AI apps.
That means Anthropic customers looking to get the most out of its technology will be best served by Amazon Web Services. What's more, it could spur even more demand for Amazon's chips as companies look to capitalize on a foundation model trained on chips made by someone other than Nvidia.
Amazon is confident it can play in the arena with Microsoft and Google in generative AI. Specifically, it sees its advantage as having secure data and many ways to store and use that data for customers. And "people want to bring generative AI models to the data, not the other way around," CEO Andy Jassy said on the company's Q2 earnings call. Ultimately, he thinks that makes AWS the long-term partner of choice for most businesses.
In the short term, though, there's a lot of focus on consumer and business-facing applications. That's where AWS has fallen behind. And falling too far behind risks it losing out on new business, as it's not seen as the place to build innovative AI applications. With the addition of Anthropic's Claude, it's shoring up that major weakness, so it can survive to the long term where we see mass adoption from enterprises and AWS actually has an advantage.
Amazon said it already saw growth rates for AWS stabilizing in the second quarter. With Anthropic coming on board, creating some buzz for the cloud service, and picking up Amazon's shortcomings, Amazon could see AWS revenue reaccelerate. That would give investors confidence in the stock to push the price higher. Investors interested in the sector should take the opportunity and look at adding Amazon shares to their portfolios.
