Amazon (AMZN) – Oh, Canada… Oh, AWS – December 22, 2023
Amazon’s AWS will open a second cloud infrastructure region in Calgary. This will unlock broader access to its cloud services including data analytics and its AI tools in that country. Whether it’s investments across Southeast Asia or North America, AWS remains firmly entrenched in expansion mode. Is this approach warranted and what does it mean?
Signs of greenshoots across cloud-computing have been broad-based. Azure (Microsoft) and AWS both put up strong quarters with outperforming demand and upbeat commentary. AWS further talked up workload (or usage) optimization shifting to a newfound appetite for incremental workloads. Most of the optimization AWS saw throughout 2023 “already happened” with optimization demand “attenuating.” Sales cycle elongation has also normalized across the large cloud providers, while AWS signed more deals in the month of September vs. the rest of Q3 as a whole. Jassy told us that this momentum would prop up growth through 2025. Oracle’s cloud struggled a little bit in Q3 while Google was more average, but AWS and Azure are the two titans. Both are enjoying brighter days.
There’s additional evidence for general cloud sector health. More niche cloud players like MongoDB and Snowflake, among many others, had strong quarters. Both companies rely heavily on usage and cloud-based revenue. As we’ve covered throughout this earnings season, usage-based revenue is easier to boost or cut than subscription-based revenue. So? The fact that cloud customers are leaning into what they can better control is another positive sign of the sector having found its footing.
Just a few months ago, analysts were panicking about AWS growth slowing to 11% Y/Y amid raging macro headwinds and very tough comps. Those headwinds were always going to ease considering how early we are in the on-premise to cloud migration our world still is. Customers cannot optimize workloads forever. They eventually become… well… optimal. Comps were also inevitably going to get easier and they have.
So what does this mean? We talk a lot about margin potential within the marketplace. There are many tweaks happening within Amazon’s cloud business to boost profitability. We cover them all extensively. While all of those tweaks are important, AWS’s acceleration is perhaps even more important. The majority of Amazon’s profits come from AWS despite just 16% of its quarterly revenue coming from that segment. More revenue here, with the 30% EBIT margin, would add fuel to the margin expansion wildfire as marketplace/fulfillment profit levers are pulled. The stars are aligning for Amazon’s 2024 profits to continue vastly exceeding expectations. That’s what I expect… just like I expected in 2023.
