THE pressure is on Amazon.com to deliver on lofty expectations for cloud computing in its fourth-quarter results on Thursday (Feb 6), after Microsoft and Google’s lacklustre reports jolted investor faith in Big Tech’s billion-dollar investments in artificial intelligence (AI).
Shares of major tech companies surged in the past two years on the belief that massive data centre needs for AI technologies would power investment for years.
But that was before Chinese startup DeepSeek said it had achieved AI breakthroughs at a fraction of the cost, precipitating a sell-off in technology stocks that some say was overdue.
Still, Amazon may be better positioned than rivals to capitalise on cheaper AI, analysts say, due to its massive cloud business and lower exposure to costly large-language models that power apps such as ChatGPT.
The company is also set to release its long-awaited, and delayed, Alexa generative AI voice service, according to three sources familiar with the matter, and has scheduled a press event for later this month to preview it.
Amazon Web Services (AWS), the world’s largest cloud services provider, is expected to post its strongest revenue increase in eight quarters at 19.3 per cent, according to data compiled by LSEG.
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But Microsoft and Meta were both forced to defend their AI spending plans last week, and shares of Google-parent Alphabet slumped 8 per cent on Wednesday after it said it would be spending more on capex than analysts anticipated.
“Microsoft and Google results have put even more of a microscope on Amazon’s cloud growth,” said Dave Wagner, portfolio manager at Aptus Capital Advisors, which holds shares in all three technology companies.
“But if Amazon can crush it on their cloud numbers, the market’s going to absolutely love that report.”
The company was the first big cloud provider to embrace DeepSeek’s AI models last month and has said its capital spending, mostly on AI, would be more than the US$75 billion it estimated for 2024.
Slowing growth at Microsoft Azure and Google Cloud, the second and third-biggest cloud players, has sparked some caution from analysts about AWS’ performance.
“Microsoft said it was capacity constrained, Google said it was capacity constrained. More than likely, Amazon is going to say it may have been capacity constrained as well and that’s why its growth rate is not quite up to what the market may have expected,” said Bob O’Donnell, chief analyst at TECHnalysis Research.
Some analysts see the weakness at rivals as a sign that Amazon may have caught up in the AI race through efforts including doubling its investment in Anthropic and offering a wide selection of AI models on its cloud platform.
“We actually believe that AWS is regaining share. It had been growing a lot slower than Microsoft Azure and Google Cloud for a period of time, but we believe that as Amazon has caught up on its AI offering, it may have less of a deceleration than Azure and Google Cloud,” DA Davidson analyst Gil Luria said.
The company has maintained a higher valuation than some of its rivals, with a current forward price-to-earnings ratio of nearly 39. Microsoft’s forward P/E is 29 and Alphabet’s 22.4, according to LSEG data.
Retail strength
The e-commerce giant’s results are also likely to benefit from a healthy holiday shopping season, after rival retailers such as Target and a slew of apparel companies issued rosy forecasts over the past month.
Amazon’s North American sales for the fourth quarter are projected to rise 9 per cent year on year. After a slowdown in online sales growth earlier this year, analysts say Amazon is primed for a rebound in the retail business, which has influenced its post-earnings share movements over the past two quarters.
Data from Adobe Analytics showed US shoppers splurged online between November and December 2024, spending more than US$240 billion, drawn by deep discounts on everything from TVs to toys.
The holiday spending growth rate of 8.7 per cent almost doubled from the 4.9 per cent recorded in 2023, the data showed.
Amazon has also tried to improve delivery times and expanded product merchandise, including its focus on grocery, pharmacy and fashion – moves analysts say will help propel growth.
“Most indications are that it was a good quarter. There was a good holiday season for the consumer and so there’s plenty of reason to believe Amazon will have done well in that side of the business,” Luria said. REUTERS
