Amazon Stock Alert: AWS Weakness Threatens $200 Dream

Stocks to sell

Since I wrote about Amazon’s (NASDAQ:AMZN) $190 breakout, the stock has failed to breach the $200 territory. My original thesis cited the “Prime Day” effect where Amazon stock historically did well because of Prime Day (happening in mid-july this year), not to mention that July has traditionally been a good month for the markets.

In addition, I cited Amazon’s successful cost-cutting measures, Amazon Web Services profitability, and positioning as a significant advertising player as reasons to be bullish. 

However, as July wraps up and its valuation increases, I no longer believe it is a good time to invest in Amazon stock. The stock’s valuation is now rich, and investors have limited upside. 

My reasoning stems from AWS’s weakness and the market’s overly positive pricing of the company based on its success in cloud computing. 

Losing Market Share

First, we know that Amazon’s AWS has started losing market share for the first time in years. Earlier this year, it lost two percentage points of market share in cloud computing, putting its current number at 31%. Meanwhile, Microsoft’s (NASDAQ:MSFT) Azure gained two percentage points. 

If we look at the growth rates of cloud computing companies, we can see that Azure and Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google Cloud have seen 31% and 28% revenue growth respectively year-over-year. Meanwhile, Amazon only gained 17% YOY

Azure Is Better Positioned for Gen AI Than Amazon

Four out of five Fortune 500 companies already use Microsoft products, making Azure more convenient for cloud infrastructure implementation. As a result, it is used by 95% of Fortune 500 companies. In addition, 5% of Azure customers spend over $100,000 per month, while Amazon spends only 2.3%. 

AWS had the first-mover advantage in cloud computing and built its user base on many SMEs. However, they’ve had trouble capitalizing on enterprise users. This is concerning, since most hype behind AI is how much enterprises would spend to transition their businesses. 

However, AI models are notoriously expensive, and enterprises will likely spend most of the money. 

Amazon will probably have to lower prices or offer discounts as competition heats up, further lowering margins. This is supported by the fact that it has reduced the cost of AWS 106 times since its launch in 2006.

Most of the Earnings Is Backed By AWS

AWS’s performance is crucial for the stock. Estimates put AWS’s revenue at around $25.04 billion in quarter 1 of 2024, 17.47% of Amazon’s revenue. What’s most significant is that it made $9.42 billion in operating income, over 61% of Amazon’s operating income. 

The hype associated with AI and Amazon’s dependence on its high-margin business model of cloud computing for profitability means that any negative sentiment could massively hurt its stock. 

Amazon will announce earnings on Aug. 1, which could provide fresh data on AWS’s performance. If the earnings report shows it continues to lose market share or margins are hurt, Amazon’s stock could take a big hit even if other business segments perform well. 

Amazon Stock Is Richly Valued

Even though it’s losing market share in its core cloud computing market, its valuation is now higher than some of its strongest competitors. For example, Microsoft trades at a trailing price-to-earnings ratio of 39.82x, while Amazon trades at a trailing P/E of 55.84x. Google trades even lower at a P/E of 29.31x

If anything goes wrong with Amazon’s AWS, its high valuation will undoubtedly suffer. Therefore, I’ll soon be less bullish on Amazon and trim some of my positions.

On the date of publication, Michael Que held a LONG position in AMZN. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

On the date of publication, the responsible editor did not have (either directly or indirectly) and positions in the securities mentioned in this article.

Michael Que is a financial writer with extensive experience in the technology industry, with his work featured on Seeking Alpha, Benzinga and MSN Money. He is the owner of Que Capital, a research firm that combines fundamental analysis with ESG factors to pick the best sustainable long-term investments.

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