Amazon’s cloud cash cow is slipping out of sprint mode and into marathon mode.
The $20.5 billion revenue posted by Amazon Web Services (AWS) in the quarter ending Sept. 30, 2022 clocked in below expectations. Zacks Investment Research had predicted AWS net sales would be a slightly higher $20.8 billion. Analysts polled by StreetAccount were expecting more— $21.1 billion.
The 27% uptick from previous quarter growth was the slowest growth the cloud business has logged since Amazon started breaking out the segment’s numbers in 2014. While disappointing in the short-run, it’s a sign of less volatile and more habit-forming maturity level for the industry.
“The broad disclaimer on AWS margins is that they will fluctuate over time as we balance investments versus renegotiating pricing with the long-term customer commitments, all as headwinds to the business, offset by increasing productivity and efficiencies in our data centers, which drive profitability.” —Brian Olsavsky, chief financial officer, during Amazon’s earnings call
On the earnings call, Olsavsky pointed out several reasons—largely macroeconomic—for the slowdown, especially in Europe:
🇨🇿 Inflation in wages this year, particularly on Czech employees, is heavily concentrated in AWS.
⚡ Energy costs are materially higher, up more than two times over the last couple of years. The company is still figuring out ways to “optimize operations to use less energy.”
⛽ Fuel costs are high in Europe, “even more certainly” than the US.
🤐 Lower demand across industries like financial services, the mortgage business, cryptocurrencies are showing up as reduced volumes. “Basically, what we see is customers are looking to save money versus their committed spend.”
Amazon is working with customers to tweak how they use AWS to optimize their spends and increase its own revenue.
“They can manage workloads better. They can switch to lower-cost products that have different performance profiles. They can switch to Graviton chips that have higher cost performance ratios,” Olsavsky explained.
16%: AWS’ share of Amazon’s total revenue
26.3%: AWS operating margin, down from 29% last quarter
$5.4 billion: AWS operating income, down from $5.72 billion last quarter
$127.10 billion: Amazon’s total revenue, short of Refiniv’s $127.46 billion forecast
20%: Amazon’s shares plunged in after hours trading on disappointing earnings
In 2020, the pandemic led to the meteoric rise of cloud computing as people lived and worked from home. But the unprecedented boom period has come to an end as normalcy returns. And rising interest rates, sky-high inflation, and fears of an impending global recession are dampening the mood further.
“We’re seeing some budgetary pressure on the enterprise side,” Piper Sandler equity research analyst Brent Bracelin told Yahoo Finance. “We certainly wouldn’t say enterprise software, cloud is immune from the macro and we’re starting to see cracks.”
But Amazon, the leader that dominates almost 40% of the market, is confident that there’s room for tailor-made cloud offerings to grow. The storing of data on third-party platforms like Amazon allows businesses to “turn what can normally be a fixed expense into a variable expense,” and in turn “manage the highs and lows of inflation and other cost of electricity and everything else,” says Olsavsky.
Compared to 2020’s volatility, the business environment is cautious. It may lead to short term dips in demand, but this fine-tuning will benefit long-term cloud adoption. Instead of sporadic spikes, any changes in cloud consumption patterns are likely here to stay.
Amid heightened global uncertainty and circumspection, Amazon’s cost-cutting plans have included pausing hiring in certain businesses like retail and logistics, and shutting down less profitable projects and services. Earlier this month, a New York Times report suggested that AWS was spared the proverbial guillotine, but that’s not entirely the case.
The company has fulfilled its hiring needs in some areas of AWS, a company spokesperson told the New York Post this week. While the magnitude of the hiring freeze is not known, experts worry that a staff slimdown could signal that decelerating growth could persist even in the most resilient sectors.
But AWS is comfortably far away from the danger zone for now. “We continue to ramp up our investments in AWS, adding product builders and sales and professional services headcount to help customers save money, invent more quickly in their businesses and transition to the cloud,” Olsavsky said.