Amazon's Cloud Growth in Focus as Microsoft, Google Struggle

Amazon.com is facing intense scrutiny as investors await its fourth-quarter earnings report on Thursday, where its cloud computing performance will be under the microscope, Reuters reports. This comes after lackluster results from Microsoft and Google sent shockwaves through the tech sector, raising concerns about the viability of massive AI investments.

The tech industry has witnessed a surge in valuations over the past two years, fueled by the belief that AI's insatiable need for vast data centers would drive sustained investment. However, this narrative was disrupted when Chinese startup DeepSeek announced AI breakthroughs achieved at significantly lower costs, triggering a sell-off in technology stocks.

Despite this market shift, analysts believe Amazon may be better positioned than its rivals to capitalize on cost-effective AI. Its massive cloud business and limited exposure to expensive large-language models (LLMs) are seen as key advantages. The company is also poised to unveil its long-awaited Alexa generative AI voice service, further bolstering its AI capabilities.

Amazon Web Services (AWS), the world's largest cloud provider, is projected to post its strongest revenue growth in eight quarters, with an anticipated 19.3% increase, according to LSEG data. However, recent struggles at Microsoft and Meta, who were forced to defend their AI spending plans, and Google's 8% stock slump following higher-than-expected capex announcements, have cast a shadow over AWS's performance.

"Microsoft and Google results have put even more of a microscope on Amazon's cloud growth," stated Dave Wagner, portfolio manager at Aptus Capital Advisors. "But if Amazon can crush it on their cloud numbers, the market's going to absolutely love that report."

Amazon was the first major cloud provider to embrace DeepSeek's AI models and has indicated that its capital expenditure, primarily focused on AI, will exceed the $75 billion estimated for 2024. The slower growth at Microsoft Azure and Google Cloud, the second and third largest cloud players, has prompted some analysts to express caution regarding AWS's 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 isn't quite up to what the market may have expected," noted Bob O'Donnell, chief analyst at TECHnalysis Research.

However, other analysts view the weakness of its rivals as a sign that Amazon may have caught up in the AI race.

"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," said D.A. Davidson analyst Gil Luria.

Amazon's overall results are also expected to benefit from a strong holiday shopping season, following positive forecasts from major retailers like Target and various apparel companies. Analysts predict a 9% year-on-year increase in Amazon's North American sales for the fourth quarter.