AWS is starting to show its age.
Despite the astonishing expansion of Amazon's (AMZN - Get Report) cloud computing juggernaut over the last decade, Amazon Web Services is slowing from "hypergrowth" to mere "high growth," KeyBanc analyst Edward Yruma suggested in a preview of the company's earnings report on Thursday.
That's hardly a knock on the success of the company. "While AWS growth is poised to decelerate for the eighth quarter in a row, there are few enterprises franchises operating at an $18 [billion] scale while still growing in excess of 40% annually," Yruma wrote.
Amazon will give the latest read on its cloud business on Thursday when it reports numbers after the close.
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Overall, Wall Street expects the company to earn 2 cents per share on $41.6 billion in sales. Shares gained 0.23% to $978.16 on Wednesday
Yruma expects AWS to report $4.53 billion in third-quarter cloud revenue, an increase of 40.3% from a year ago. While the expansion is impressive, it's a bit less than the second-quarter growth rate of 42.1% and the 42.7% year-over-year increase in first quarter revenues. Amazon Web Services closed out 2016 with a 47% growth rate in the fourth quarter and a whopping 55% boost in revenues in the third quarter of 2016.
Having blazed a 60% compound annual growth rate from 2014 to 2016, Morgan Stanley analyst Brian Nowak predicts in a Wednesday report that the company will maintain a 35% CAGR over the next three years.
One reason for deceleration is the emergence of rivals such as Microsoft (MSFT - Get Report) Azure and Alphabet's (GOOGL - Get Report) Google Cloud Platform --both of which also report after the close on Thursday.
Microsoft can leverage its Office and other software platforms to win cloud computing business. Some of Jeff Bezos's ambitious moves in retail could actually work against AWS, Evercore analyst Kirk Materne noted in an earnings preview. "Amazon's acquisition of Whole Foods is acting as a catalyst for Azure within the retail and broader consumer vertical as one partner noted, 'any [consumer packaged goods] company we talk to now defaults to Azure instead of AWS,' " wrote Materne, who expects Azure to grow 89% in Microsoft's first fiscal quarter.
Google can play to its strengths in artificial intelligence and data analytics. The company recently announced a partnership with Cisco (CSCO - Get Report) to develop hybrid computing services, allowing clients to benefit from Google Cloud Platform while keeping sensitive data on their own servers.
Google Cloud Platform, Google Play, hardware including the new Pixel 2 phone and other non-search businesses have promise but will take time to develop, Macquarie Capital analyst Benjamin Schachter wrote in a Wednesday note. "We continue to believe that the Cloud business has the biggest potential, but I think it is likely going to need a significant acquisition in order for it to become more relevant to the financial model and investors," he suggested.
Even if these competitors do not steal clients outright from Amazon Web Services, Keybanc's Yruma noted, they can take market share as big corporations diversify their cloud vendors.
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