As was the case for most companies at the time, the inflation bug bit Amazon (AMZN 0.29%) last year. Higher costs for things like fuel, labor, warehouse space, and even merchandise dramatically raised its freight and fulfillment costs, eating into its profitability. Its cloud computing arm -- Amazon Web Services (AWS) -- wasn't shielded from this headwind.
That challenge now seems to have lifted, however, in light of the company's third-quarter results. But now, there's a new problem to solve: AWS's sales growth didn't quite live up to expectations.
Except that might not be the problem most people seem to think it is.
Recapping Amazon's Q3
In the third quarter, Amazon turned $143.1 billion worth of revenue into operating income of $11.2 billion and net income of $9.9 billion. All of those figures are up from the prior-year period with the bottom-line numbers well up year over year thanks to (relatively) lower operating costs.
Although it's the smallest business in terms of revenue, as has been the case for several years now, Amazon Web Services accounted for the lion's share of the company's total operating profits. Specifically, it contributed $7.0 billion to the bottom line after driving $23.1 billion in sales.
That wasn't a smashing victory for Amazon's cloud computing business, however.
Although its revenue was up a healthy 12.3% year over year, Wall Street was expecting revenue of $23.2 billion. Moreover, the pace of Amazon Web Services' revenue growth continues to slow, further raising alarm.
What if, however, this isn't the problem that some are making it out to be?
Because as it turns out, it isn't.
Rolling right along
AWS revenue did fall short of expectations -- that's a problem. Although Amazon shares rallied following the third-quarter report, AWS is the company's breadwinner, so investors always watch the segment closely.
The graphic below helps put things in perspective. Last quarter's AWS revenue of $23.1 billion extends a surprisingly straight-line growth trend going all the way back to 2019. The smaller growth rate of 12.3% last quarter was solely the result of the comparisons being made between ever-bigger numbers.
Data source: Amazon. Chart by author. Dollar figures in billions.
That's not to say growth rates can't accelerate over time. At 17 years of age, however, Amazon Web Services' days of accelerating growth are likely in the rearview mirror. Alphabet's Google Cloud is suffering from the same mathematically driven phenomenon. That is, its relative growth rate on a percentage basis is slowing even though its dollar-based growth is holding steady.
In the meantime, the chart above illustrates that a much more pressing problem appears to have been solved: AWS's profitability.
Operating margin had remained in the ballpark of 30% for years right up until the inflation surge. Then, they fell below 25%. With cost increases finally having cooled off significantly and Amazon figuring out how to keep costs down, AWS's operating margin has steadily climbed back to its historical benchmark. That added more than $1 billion to the company's third-quarter bottom line.
The next problem to tackle isn't exactly a deal-breaker
It would be great if the company could reaccelerate Amazon Web Services' growth rate to yesteryear's levels. That's not likely to happen though, and it's arguably unreasonable to expect it of Amazon. The company's biggest challenge here isn't even managing investors' expectations (although it couldn't hurt to better highlight AWS's persistent sales growth trajectory).
The next problem Amazon really needs to tackle is its recent lack of market share growth.
As data from Synergy Research shows, at least through the second quarter of this year, Amazon Web Services' share of the public cloud computing market has been stagnant since 2018 while rivals like Google and Microsoft are slowly but surely gaining share.
Data source: Synergy Research. Chart by author.
And Synergy's numbers jibe with those from tech market research outfit Canalys.
The third quarter's cloud computing market share reports aren't out yet, so it's possible AWS did actually gain market share with its 12.3% sales growth.
In the meantime, even if Amazon isn't actually gaining cloud computing market share, it's still a tough stock not to like ... particularly now that it's firing on all cylinders again. AWS is expanding its margins, and Amazon's North American e-commerce business is back in the black as well after dipping into the red for the better part of last year. It's just one of those companies you don't want to bet against for very long, if you dare to bet against it at all.
