Google's Cloud Disappointed, Microsoft's Impressed. What's In Store For Amazon?

The strength of the cloud business at Microsoft sent the tech giant's shares soaring after the company reported earnings Tuesday, while Google's weak cloud sales triggered a sell-off in Alphabet shares. Now, the stakes are high for AMZN stock, as Amazon.com, the most dominant of the Big Three cloud giants, gears up for its own report.

AMZN Stock: Expectations For AWS 'Already Reset'
Google shares are down nearly 9% in recent action Wednesday. That's despite a Q3 earnings report with revenue and earnings that topped views. Google's cloud-computing revenue rose 22% to $8.41 billion, but missed estimates of $8.64 billion. The cloud-computing business posted 28% growth in the June quarter.
Microsoft stock, on the other hand, is up about 2.5% in recent action. The company's earnings report late Tuesday showed the Intelligent Cloud division, which includes its Azure cloud services business, boosted revenue 19% to $24.3 billion, topping views.

KeyBanc Capital Markets analyst Justin Patterson said in a client note Tuesday that "Google Cloud appears to have ceded market share to Microsoft Azure."

For Amazon Web Services, "last night's MSFT (and) GOOGL prints suggest 'flattish' growth is likely more realistic than re-acceleration into 3Q," wrote Piper Sandler's Champion in a client note Wednesday. "While optimizations continue — and were mentioned in both prints — we think investor expectations for 3Q have already reset to (around) 12% for AWS, similar to last quarter."

Further, with AMZN stock trading down in recent weeks, Champion believes "the more flattish/mixed cloud environment has been absorbed in the stock."

According to FactSet, analysts project Amazon will post a 13% year-over-year increase in third-quarter AWS revenue to $23.2 billion.

Amazon's AI Push
Amazon remains the most dominant cloud player. Last year, the company captured 40% of the cloud services market, which compares with 21.5% by Microsoft and 7.5% by Google, according to estimates by Gartner.

But AWS has come under pressure, along with the broader cloud market, as companies cut costs on software spending. AWS revenue grew 12% year-over-year for the second quarter, to $22.1 billion. Meanwhile, AWS sales grew 16% in the first quarter and 33% in Q2 2022.

Analysts have approached the AWS business with caution for the coming quarterly report. UBS, for instance, rates AMZN stock a buy overall with a 178 price target. But analyst Lloyd Walmsley lowered that target slightly earlier this month, citing potential short-term headwinds for cloud revenue.

Longer term, analysts are watching how Amazon matches up with Microsoft on the AI front. Microsoft is seen as having a head start. At the start of the year, Microsoft invested $10 billion in OpenAI, the creator of the ChatGPT chatbot that set off the AI frenzy late last year.

Amazon answered back in September, with a deal to invest up to $4 billion in OpenAI rival Anthropic. Further, Amazon in April launched Amazon Bedrock, a service that allows users of Amazon's AWS to build generative AI applications.