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Why Amazon Investors Shouldn't Lose Sleep Over Microsoft Azure's Growth

Azure grew at a much faster rate than AWS last quarter, but there's still a long runway ahead for cloud growth, according to analysts.
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Amazon’s AWS segment drove huge earnings in the fourth quarter. Now the question is whether investors can expect a repeat performance going forward. 

AWS delivered $9.95 billion in quarterly revenue, easily beating expectations of $9.84 billion and fueling a handsome profit of $6.47 per share. But the segment, which grew 34% in Q4 versus 45% in the year-ago quarter, and 35% in Q3 -- also isn’t growing as fast as it once did. And percentage-wise, it’s also growing far less quickly than Microsoft’s  (MSFT)  Azure, which posted 62% growth in the fourth quarter.

That’s not necessarily a cause for worry, according to many analysts.

“Between last year's JEDI contract award, recent enterprise IT manager survey data, as well as anecdotal sentiment checks, there certainly was already some concern amongst investors over AWS's trajectory even prior to the Microsoft report,” said Vincent Ning, analyst at Titan Research. “Despite all that, AWS managed to maintain stable growth in Q4 at twice the run-rate size of Azure and with roughly half the total public cloud market still in its pocket. We think this is quite the feat and points to a market for public cloud that's still rapidly growing with a long secular runway ahead.”

Last year, Amazon’s loss of the $10 billion Pentagon cloud contract to Microsoft, along with various pieces of survey data, fueled concerns that the tide was turning against AWS. Amazon’s shrinking cloud margins (26% last year versus roughly 30% as of one year ago) also suggest that it isn’t taking its leading position for granted.

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“The takeaway is that they’re still investing in the business, and while Microsoft has been growing much faster, they’re still starting from a much smaller position,” added Tuna N. Amobi, analyst at CFRA Research. “Overall, I think [Amazon is] still in a very, very good place.”

On a call with shareholders, Amazon CFO Brian Olsavsky attributed the strength of AWS to investments in new features, sales and marketing, and regional infrastructure expansion. He also said that Amazon’s “very big lead” in the cloud space will help it weather competition, which includes Alphabet's  (GOOGL)  Google Cloud and IBM  (IBM)  in addition to Microsoft.

For anyone worried about rivals snatching market share from AWS, it helps to pay attention to raw dollars over growth rates, according to Patrick Moorhead of Moor Insights & Strategy. 

"As AWS gets larger, the percentage growth will decline due to the law of large numbers, so I urge everybody to focus on dollar growth and compare it to its competitors like Google Cloud, IBM Cloud and Azure," he said. 

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