Is Amazon Web Services (AWS) a Liability for Amazon?

Amazon (AMZN -0.41%) is known for e-commerce, but the company has a lot more going for it than that. It has a thriving service segment with third-party seller services, advertising, and subscriptions. And one segment that has received a lot of attention is Amazon Web Services (AWS), its cloud computing operation.

While this segment used to be Amazon’s best and brightest, it no longer holds that designation. So, is AWS starting to become a liability for its parent?

AWS is starting to fall behind its peers

Cloud computing is an important part of business infrastructure. Instead of companies purchasing their own computing equipment, they’ve migrated to the cloud, where the workloads are processed by off-site computers owned by one of the cloud computing providers, like AWS. This allows companies to stay nimble and scale up or down when necessary.

Cloud computing is also a huge factor in artificial intelligence (AI), which requires a lot of data in order to make well-informed models. And using a cloud computing provider like AWS is an excellent way to gather and store data. Then, when it comes time to create the model, Amazon has high-powered servers that can crunch the data efficiently.

As a result of the AI arms race, AWS should see its revenue grow rapidly, but it isn’t.

In the fourth quarter, it posted revenue growth of only 13%. It underperformed Amazon’s North American segment (up 17%) and was on par with its international business (up 13%).

But it’s much better to compare AWS to its closest competitors: Microsoft Azure and Alphabet‘s Google Cloud. Azure’s revenue rose 30% over the same time frame, and Google Cloud’s revenue increased 26%. While AWS is still the industry leader in market share, continual results like what was seen in the fourth quarter could cause the segment to lose its crown.

But this situation might be changing. Management said in its fourth-quarter conference call that the effect of cost optimizations seen in 2023 is starting to go away, and new workloads are coming online. This change could be huge news for investors, since AWS is crucial to Amazon’s business model in another way.

AWS has been a huge benefit to the business

Although AWS hasn’t been performing well lately, it’s still vital to Amazon’s business. In the fourth quarter, Amazon produced $36.9 billion in operating income, and $24.6 billion (67%) came from AWS. Without its cloud business, Amazon isn’t nearly as profitable, and the operating profits from the segment have long funded expansions in other areas of the parent company’s business.

Furthermore, the rise of AWS has helped Amazon’s gross margins to substantially improve over the past decade.

AMZN Gross Profit Margin Chart

AMZN gross profit margin, data by YCharts.

A higher gross margin allows for greater profits, and AWS has been crucial in improving this metric for Amazon.

Clearly, AWS isn’t a liability for Amazon, but this segment needs to have a strong 2024 to remain on top of the cloud computing industry. With AI workloads coming online often, the market is full of customers, and Amazon has to bring them onboard before Microsoft or Alphabet does.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Keithen Drury has positions in Alphabet and Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, and Microsoft. The Motley Fool has a disclosure policy.

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