Amazon.com shares fell by 8.6% on Friday morning in premarket trade as investors reacted with concerns over the second quarter results of Amazon Web Services, which revealed that AWS, Amazon’s cloud computing division, grew slower than its key competitors Microsoft and Google.
The reaction comes despite Amazon’s stronger-than-expected profits and relatively upbeat outlook.
AWS’s revenue grew 17.5% on an annual basis to $30.87 Billion for the third quarter.
The growth rate was faster than in previous quarters but still fell behind the cloud-based gains made by the competitors.
Microsoft Azure reported 39% growth in sales and Google Cloud grew 32%. Both significantly beat AWS.
Investors were disappointed by the results, as they hoped Amazon would be able to ride on a wave of cloud computing demand driven by artificial intelligence with similar momentum.
Matt Britzman is a senior equity analyst with Hargreaves Lansdown. He noted that AWS was under pressure to deliver in the face of increased expectations.
He said that while Microsoft and Alphabet had already demonstrated strong growth in the cloud, AWS was not the big winner many expected. This shows how closely investor sentiments are tied to AI right now.
Amazon CEO Andy Jassy said that when asked about AWS’s growth, during the earnings call of the company, “we are significantly larger in our AWS segment.”
High AI expenditure results in lower than expected profit outlook
Amazon expects operating profits between $15.5 and $20.5 Billion in the third-quarter, compared to $17.4 Billion a year ago.
Dan Coatsworth, AJ Bell’s analyst said that the profit guidance was lower than anticipated because Amazon has spent a lot on AI infrastructure. They view it as critical to long-term competition but also increases costs in near term.
Coatsworth noted that, while Amazon is still profitable and dominates in the e-commerce sector, investors have shifted their focus to the speed of cloud growth and returns from AI investments.
Amazon struggles to keep up with rivals Microsoft, Alphabet and Microsoft in terms of sales growth.
Investors are jittery due to uncertainty over tariffs
The potential impact of US Tariffs is another emerging concern, especially under President Donald Trump’s trade policy.
Amazon’s executives stated that the retail operation of their company has been protected from any major impact. However, they noted that the majority of inventory imported during the third quarter was purchased in advance of potential tariff increases.
On a conference call with analysts CEO Andy Jassy stated that the company had no idea what the future tariffs would be, particularly in China.
Analysts at JPMorgan said that although suppliers and not Amazon may have been the ones to bear most of this tariff pressure, there is still room for more volatility.
Value holds but sentiment wanes
Amazon is valued at a high level, as its forward price to earnings ratio stands at 33.87. This compares with Microsoft’s 34.19 but also significantly higher than Alphabet (18.64).
The sharp drop in stock price before the market opens shows investors becoming more aware of execution risk, particularly when it comes to the AI-driven race for cloud computing.
Amazon closed at $234.11 on Thursday, an increase of 1.7%. However, the stock fell to $216.02 during Friday’s morning premarket.
The company’s market performance will be determined by whether it can re-ignite its confidence in AWS to serve as its AI backbone in the coming quarters.
As new information becomes available, this post Amazon shares drop more than 8 percent premarket after AWS disappointing investors’ growth may be updated.
