Amazon’s Golden Goose: Still Laying Eggs or Now a Red Flag for Investors?

Once the darling of Wall Street, Amazon's cash cow is facing scrutiny. Is the e-commerce giant's growth engine sputtering—or just taking a breather?

Clouds gather over AWS

Revenue growth slows to single digits. Margins compress as rivals eat their lunch. The 'everything store' suddenly looks vulnerable.

Retail reckoning

Prime membership hikes backfire. Warehouse expansions stall. Even Alexa seems to be losing her voice in the smart home wars.

Regulatory target painted on back

Trustbusters circle. Labor unions mobilize. That 90s startup vibe is long gone—replaced by all the baggage of a corporate titan.

The bottom line: When your stock trades at 50x earnings in a 5% rate environment, perfection's already priced in. One miss and those growth investors turn into vultures faster than you can say 'dot-com bubble.'

Image source: Amazon.

Why Microsoft and Google are outgrowing AWS

The biggest concern for Amazon investors right now is that while AWS remains the largest cloud infrastructure platform, its smaller rivals are growing much faster than it is, showing they may be beating it in the artificial intelligence (AI) race. For example, Azure's growth rate was more than double that of AWS in the June quarter.

Although 17% growth isn't shabby for a business the size of AWS, given the conditions in the industry -- with AI spending surging and its rivals growing faster than 30% -- investors have to ask what happens to AWS in a weaker macroeconomic environment or if the AI boom fizzles. Given its current underperformance, it seems likely that its growth WOULD fall to single digits or potentially turn negative.

Gil Luria, an analyst at D.A. Davidson, called the AWS results "very disappointing" and said that Azure could surpass AWS as the top cloud infrastructure business by the end of the year.

On its earnings call, Amazon noted that demand is outpacing capacity at AWS. That should be good news and could explain the slower growth. But even with that dynamic, the company saw margins compress, indicating it could be losing higher-value business to Alphabet and Microsoft, both of which have been at the forefront of the AI race while Amazon arguably got off a slow start.

Amazon is stepping up its capital expenditures in the second half of the year in order to provide more capacity, and free cash FLOW has been negative for the first half of the year, showing that the company has already accelerated infrastructure spending to add new data centers to support cloud growth.

What it means for Amazon

There's no single reason Amazon is losing market share in cloud computing to Google and Microsoft, a trend that has now gone on for several quarters, but there are a number of factors at play here.

First, Amazon invented and pioneered cloud infrastructure services, and it had a seven-year head start, according to company founder Jeff Bezos. Naturally, as Amazon has shown the massive market for cloud computing, Alphabet and Microsoft have hustled to close the gap.

Those two competitors also have their own advantages in the industry. Microsoft is the leading enterprise software company. And for businesses that are already using Microsoft for services from Windows to Office to Dynamics ERP, keeping your data in Azure rather than AWS might make more sense. Google Cloud, meanwhile, is a leader in AI and analytics, and it's also known for its open-source and developer-centric approach.

Both challengers have also become more price-competitive with Amazon over the years.

Overall, AWS, which generated more than $10 billion in operating income in the second quarter, remains a golden goose for the company, and its relatively slow growth isn't a reason to sell Amazon stock.

Nonetheless, investors should pay attention to its performance over the coming quarters. If its growth slows further or the gap widens with its rivals, that could weigh further on the stock. On the other hand, based on management's statement that demand is outstripping supply, investors should expect AWS' growth to accelerate in the coming quarter as it moves through its capital expenditure cycle.

The next few quarters of results should be telling for the future of AWS. If the cloud business continues to disappoint, expect Amazon stock to head lower.