Amazon.com (NASDAQ:AMZN), the world’s largest e-commerce company, is also a leading player in the cloud computing market. The slowdown in the Amazon Web Services (AWS) segment over the past few quarters has led to negative investor sentiment towards the tech giant, but this represents a good opportunity for long-term investors to make money. The company is being hit by the tough macroeconomic conditions in the short term, but Amazon still has years of growth ahead of it. That’s why I’m bullish on Amazon.
AWS Segment Outlook
Although Amazon has built its reputation around its e-commerce business, its most profitable segment is AWS, its cloud business. For comparison, the North America segment and the International segment reported operating losses of $200 million and $2.2 billion, respectively, in the fourth quarter, while the AWS segment reported operating income of $5.2 billion. The AWS segment is still the company’s smallest segment from a revenue perspective, although it contributes the bulk of operating profit, underscoring the highly profitable nature of this business.
In the fourth quarter of 2022, AWS revenue grew 20% year over year to $21.4 billion. While a 20% gain seems substantial, investors are used to the cloud segment growing much faster, which explains the negative market reaction following the earnings release. The company said that the AWS segment grew even more slowly in January, adding to investor fears.
The slowdown in AWS revenue last quarter obscured some of the big gains the company made from a new customer growth perspective.
In the fourth quarter, Yahoo Ad Tech selected AWS as its preferred cloud partner for developing immersive solutions for its clients, Nasdaq (NASDAQ:NDAQ) completed the migration of its MRX trading system to the cloud, Brookfield Asset Management (NYSE:BAM) exited Partnered with AWS for its renewable energy business and Duke Energy Corporation (NYSE:DUK) chose AWS for its smart grid solutions.
The company is expanding AWS Availability Zones and AWS Regions to meet projected increasing demand for cloud computing services worldwide. In the fourth quarter, new AWS Regions were launched in Spain and Switzerland, while a second region in India was added to support strong demand for cloud infrastructure in India, resulting from multiple investments in IT infrastructure billions of dollars in the country.
Amazon plans to expand its global footprint by introducing 15 Availability Zones and five regions in the coming quarters. The growing scale of the AWS network should help the company onboard new, global customers.
Amazon is also expanding its AWS product portfolio, which is another promising sign. In the fourth quarter of 2022, the company added new features to its product portfolio such as Amazon Clinic and announced several other products including Security Lake, DataZone, AWS Supply Chain and AWS SimSpace Weaver. With AWS revenue growth slowing, the company is doubling its investments in the cloud segment, which is an encouraging sign given the sector’s bright long-term prospects.
Macroeconomic tailwind
According to Statista data, Amazon is the world market leader for cloud infrastructures with a market share of 34% in the third quarter of 2022. Microsoft Corporation (NASDAQ:MSFT), the industry’s second-largest player, is a long way behind with a 21% market share, underscoring Amazon’s competitive advantages today. As Amazon continues to invest in people and products, AWS is likely to remain a leader in this market for the foreseeable future.
In the short term, companies are cutting their IT infrastructure investment budgets due to the increasing likelihood of a recession this year. As a result, investment in cloud migration will decline this year — at least for the first half of the year. Amazon’s financial performance will be impacted by this negative development, but over the long term, the trend will reverse.
The flexibility and scalability associated with cloud computing, cost efficiency, the increasing number of employees working remotely, tools available in the cloud for seamless collaboration and the growing number of internet-connected devices requesting access to confidential company data are reasons for every company to migrate to the cloud. This tailwind has provided AWS with a strong platform to grow over the next decade as a global leader in cloud infrastructure solutions.
Is Amazon a buy according to analysts?
Morgan Stanley (NYSE:MS) analyst Brian Nowak last week reiterated his buy rating on Amazon amid slowing revenue growth in the AWS segment, claiming that the segment’s revenue growth will bottom out by the end of the second quarter, marking the end of the second quarter Paving the way for Amazon AWS revenue will grow at a rapid pace in the second half of the year. The analyst expects AWS revenue to grow 19% this year, in which case annual revenue will surpass $100 billion. Brian Nowak has a price target of $150 for Amazon.
Overall, based on 38 analysts’ ratings, the average target price of Amazon stock is $137.05, which implies a 45.8% upside potential from the current market price.
take that away
The slowing growth of the AWS segment has unsettled investors and created market uncertainty about Amazon’s growth potential. Despite these fears, the segment seems well-positioned to grow exponentially over the next decade and well reward long-term investors.
disclosure
