Amazon Earnings Preview: All eyes on AWS after Microsoft cloud's high and Google's low

Microsoft beat estimates with a 13% increase in revenue and ended gaining $70 billion in market capitalisation, while Alphabet, the parent company of Google, disappointed with its cloud earnings and lost nearly $170 in market cap.

Wall Street is also keeping a keen eye on a key industry trend: artificial intelligence. Amazon, Microsoft, and Google are in a race to offer generative AI services.

As of Wednesday's stock market action, Amazon's stock declined by 7.17% to $121.39 on the Nasdaq. Piper Sandler analyst Thomas Sandler told Investor's Business Daily that commentary from Microsoft and Google suggests that customers are still optimising their software spending. This indicates the possibility of flat growth in Amazon's cloud business, though this might already be factored into the stock's value.

Expectations for AWS at Amazon have already been adjusted, according to IBD, as Google's shares have fallen by almost 9% in Wednesday's trading. This is despite Google's Q3 earnings report showing revenue and earnings that exceeded expectations. Google's cloud computing revenue increased by 22% to $8.41 billion, falling short of the estimated $8.64 billion. However, the cloud computing business demonstrated 28% growth in the June quarter.

Conversely, Microsoft's stock has risen by about 2.5% in Wednesday's trading. The company's earnings report from Tuesday revealed that the Intelligent Cloud division, which includes its Azure cloud services business, achieved a 19% increase in revenue to $24.3 billion, surpassing expectations.

According to IBD, KeyBanc Capital Markets analyst Justin Patterson stated in a client note that "Google Cloud appears to have ceded market share to Microsoft Azure".

Champion, in a client note on Wednesday regarding AWS, said, "Last night's results from Microsoft and Google suggest that 'flattish' growth is probably a more realistic expectation for (Q3), similar to the previous quarter." Furthermore, Champion said believes that the market has already adjusted to the more stable or mixed cloud environment, as Amazon's stock has been trading lower in recent weeks.

According to FactSet, analysts are forecasting a 13% year-over-year increase in third-quarter AWS revenue for Amazon, bringing it to $23.2 billion.

Amazon continues to be the leading player in the cloud market, holding a 40% share of the cloud services market last year, compared to Microsoft's 21.5% and Google's 7.5%, according to Gartner estimates.

However, AWS has faced challenges, as have other cloud providers, due to cost-cutting measures in software spending. AWS revenue grew by 12% year-over-year in the second quarter, reaching $22.1 billion. In contrast, AWS sales had grown by 16% in the first quarter and 33% in the second quarter of 2022.

Analysts are approaching the AWS business with caution in anticipation of the upcoming quarterly report. UBS, for instance, maintains a buy rating for Amazon stock with a price target of $178. However, analyst Lloyd Walmsley recently adjusted the target slightly, citing potential short-term challenges for cloud revenue.

In the long term, analysts are closely watching how Amazon competes with Microsoft in AI. Microsoft is considered to have a head start, having invested $10 billion in OpenAI, the creator of ChatGPT.

Amazon responded in September by announcing a deal to invest up to $4 billion in OpenAI competitor Anthropic. Additionally, in April, Amazon launched Amazon Bedrock, a service that allows users of Amazon's AWS to create generative AI applications.

Analysts will be listening to Amazon's report to see if the company reports any similar gains from its AI efforts, similar to what Microsoft's Chief Financial Officer Amy Hood stated during the company's conference call regarding the boost to its cloud business from AI workloads.

"For Amazon, we view the Microsoft Azure results as likely a better read than the GCP results, given Azure's much greater scale," wrote Evercore ISI analyst Mark Mahaney in a client note, as per IBD. "That said, Azure's growth this quarter also benefited 3 (percentage points) from AI workloads, and we don't believe AWS will benefit as much."