I get it. I do. Investors aren't accustomed to seeing Amazon (AMZN -0.29%) struggle. That's why Amazon stock fell more than 8% on Friday following Thursday's post-close release of its second-quarter numbers, which included disappointing earnings guidance hinting at headwinds on the artificial intelligence front.
What if, however, the market's misreading the matter?
I contend this is the case, which makes the stock's recent setback a fantastic buying opportunity. Here's the deal.
(Some of) the numbers suggest Amazon is falling behind in AI
For any investors who've not yet heard (or as a refresher for those who have), for the three-month stretch ending in June Amazon turned $167.7 billion worth of revenue into a per-share profit of $1.68. That's well up from the year-ago comparisons of $148 billion and $1.26 per share, and better than analysts' estimates for a top line of $162.2 billion and per-share bottom line of $1.33. Its cloud computing arm did well too. Amazon Web Services' revenue grew 17% to $60.1 billion, $21.7 billon of which became operating income.
Amazon's cloud business's growth pace, however, was also a key reason for Friday's stumble. It trailed the cloud computing growth reported by Microsoft (MSFT -0.52%) and Alphabet (GOOG 1.29%) (GOOGL 1.27%) for the same three-month stretch. Microsoft's cloud business grew 26% year over year last quarter, while Google Cloud's sales were up nearly 32% in Q2. Investors panicked, interpreting this stark difference in growth rates as a sign that Amazon is falling behind its AI competitors.
The wording of CEO Andy Jassy's thoughts on the current status of Amazon Web Services (AWS) made during the quarterly earnings conference call didn't help. Specifically, investors read doubt into his comment "We could be doing more revenue and helping customers more, and we are working very hard on changing that outcome and how much capacity we have."
And Q3's guidance only stoked these worries. Although companywide revenue for the quarter now underway should roll in between $174 billion and $179.5 billion versus analysts' consensus estimate of $173.1 billion, Amazon's Q3 operating income is only apt to be somewhere between $15.5 billion and $20.5 billion. That doesn't compare favorably to FactSet's consensus expectation of $19.5 billion. Amazon stock tanked as a result.
Investors are seeing things all wrong, though.
The rest of the story
No, Amazon's cloud business didn't grow nearly as fast as Google's or Microsoft's did during the second quarter of this year.
There's an important detail, however, being left out of the discussion. That's the fact that AWS is more than twice as big as either of the two top rivals. In fact, data compiled by Synergy Research Group indicates that with its 30% share of the global cloud market's total revenue, Amazon's cloud business is 50% bigger than next-nearest Microsoft. And while Microsoft's total Q2 cloud revenue improved year over year, it's been losing market share since early last year. Amazon's share at least ticked a little higher last quarter.
Data source: Synergy Research Group. Chart by author.
The bigger "so what?" is the mathematics of the matter. While Alphabet (Google) and Microsoft may have produced more relative growth with their respective cloud businesses than Amazon did, it's mathematically easier to grow from a smaller comparison than a larger one. On an absolute dollar basis, AWS technically did outgrow its rivals.
Let's also not look past Synergy's data reminding us that AWS is still the planet's single-biggest cloud business. There's a reason it's been able to hold on to this lead.
And for what it's worth, several analysts made the same observation following Thursday's release of Amazon's second-quarter numbers. Wedbush analyst Scott Devitt noted, "While we understand the reaction in shares after-hours, we do not believe the company's longer-term opportunity is impaired, and our thesis remains intact." Meanwhile, although RBC Capital Markets analyst Brad Erickson concedes, "this was an uncharacteristic setback quarter that will take some time to recover from," adding "we believe in the company being able to maintain, if not accelerate, AWS growth over time, which should help restore investor faith in capitalizing on the AI opportunity."
Image source: Getty Images.
There's good reason for this optimism too. During the call Jassy touted the company's relatively new AI-agent technology as well as its recently launched AI-powered virtual digital assistant Alexa+, which is also an advertising platform. These solutions don't suggest Amazon is actually falling behind in AI. Indeed, as CFO Brian Olsavsky pointed out in his discussion of the quarterly results, Amazon's cloud backlog now stands at a hefty $195 billion, up 25% from year-earlier levels.
AWS' chief challenge right now? Mostly just a lack of access to the amount of electricity that data centers need.
Even then, however, the company's helping itself. For instance, last year it began offering data center customers access to Arm Holdings' Graviton4 processor, which consumes up to 60% less power than comparable alternative processors.
Worth it, if you can stomach it
None of this guarantees Amazon shares will be easy to own in the immediate future, of course. Echoing a sentiment from RBC's Brad Erickson, Wedbush analyst Scott Devitt believes "in the coming quarters, we expect concerns around the intermediate-term trajectory of AWS growth rate and margin could remain an overhang on shares as investors contemplate the rising perception of AWS as a laggard in the AI space."
In other words, newcomers could be in for a bumpy, sometimes-scary ride for a while.
But as the old adage goes, fortune favors the bold.
This might help bolster your confidence: While Amazon's Q3 profit guidance of $18.5 billion (at the midpoint of its suggested range) may have been shy of analysts' expectations, that's still above last year's third-quarter operating income of $17.4 billion. It's also a pretty safe bet that Amazon is being purposely conservative with its profit outlook, as it has by an average of about $2 billion per quarter for the past several quarters. Investors are just too distracted by the noisy headlines to remember.
