If you own a stake in Amazon (AMZN 3.43%), the odds are good that its fast-growing cloud computing arm is the key reason you do. While Amazon Web Services (AWS) may only account for 15% of the company's top-line revenue, Amazon's cloud business accounts for two-thirds of the company's operating profits. Better still, AWS' sales improved by 13% last year, driving this unit's operating income up by more than 15%. Not bad. Not bad at all.
However, if you think Amazon's cloud computing business is bulletproof, think again. Microsoft (MSFT 1.82%) is coming on strong, closing the gap between the two companies' cloud computing market share. Amazon can't afford to let this rival continue going unchecked. Or, maybe AWS isn't in a position to prevent it.
The cloud computing race is heating up
Don't misread the message. There's still lots of cloud computing business to go around. Numbers from Synergy Research Group suggest worldwide cloud infrastructure spending grew 20% year over year last quarter, capping off a similarly strong full year. Amazon is still the market leader, too.
Amazon's market share is dwindling, however, while Microsoft's share of the cloud computing market is clearly growing at a much faster clip. The graphic below tells the tale.
Data source: Synergy Research Group. Chart by author. Quarters, in this case, represent calendar-year quarters.
That's not catastrophic for Amazon -- at least not yet. As was noted, AWS experienced solid revenue and earnings growth in 2023. It's just that Microsoft is now faring so much better on this front. Its cloud revenue was up 20% year over year for the three-month stretch ending in December, mirroring the arm's forward fiscal progress during the quarter previous to that one.
With several years' worth of this growth disparity on the table, the threat to Amazon's cloud business is getting much bigger in the rearview mirror.
Why Microsoft is gaining on AWS
What gives? How is Microsoft able to outpace Amazon in a business that Amazon largely pioneered?
A great deal of the credit has to be given to Microsoft's cloud-computing technology, and its Azure platform in particular. In simplest terms, Azure is a platform that allows Microsoft's cloud computing customers to access dozens of cloud management tools in one interface. Its enterprise-level clients don't have to use Azure. But, given its ease of use and affordability, most customers gladly pay for the option.
AWS comes with a comparable interface for its users, for the record. It's just not the same, though.
Then there's the other, arguably bigger distinguishing factor. That is, although both companies are able to offer such tech, organizations looking to build artificial intelligence tools seem to prefer Microsoft over Amazon.
That can't come as a complete surprise. Artificial intelligence developer OpenAI licensed its GPT-3 technology to Microsoft all the way back in 2020 -- well before the chat-capable platform thrust AI onto center stage. Already strong based on what ChatGPT could do, Microsoft's 2023 earmarking of $13 billion worth of current and future investments in OpenAI only further cements the relationship into place. The duo is quickly becoming the go-to provider for AI solutions, even when customers don't even entirely know what it is they want to achieve with AI, or how to do it.
Again, AWS just doesn't have the same AI edge.
And that presents a profit problem for the e-commerce behemoth.
As could have been expected, AWS' profits -- and profit margins -- grew as the business expanded through early 2022. Then inflation took hold, pinching those profits. This pressure has eased since the latter part of last year. The bottom line is leveling off, though, and it's arguable that even Amazon's cloud computing revenue growth is slowing down.
For now, this one's the better cloud pick
This makes sense. As any market becomes more competitive, one of the first and easiest moves to make is cutting prices. And AWS has done exactly that in recent years. At the same time, AWS' long-term customers are increasingly finding ways to lower their cloud computing costs as well.
These are all victories of a sort, in that they keep paying customers on board. These price cuts and cost-reducing strategies aren't necessarily matched with reductions in AWS' own operating costs, however. AWS' fourth-quarter lull in operating profit margin rates may well be a hint of what's to come in the near and distant future.
Data source: Amazon. Chart by author. Revenue and operating income figures are in billions.
Microsoft's cloud business is likely running into the same headwind, to be fair. But Microsoft's got far more ways to monetize its business customers. It's also not nearly as dependent on its cloud computing arm for operating income as Amazon is, with only about half of Microsoft's bottom line coming from a much wider array of cloud computing profit centers.
It's not that Amazon is un-ownable here. It would be naïve, however, to ignore the threat that its breadwinning business is now facing. If you're looking for a cloud computing pick but only have room for one in your portfolio right now, Microsoft is arguably the better choice until AWS proves it can fend off the industry's second-biggest player.
