Few would deny that Amazon.com, Inc. (NASDAQ:AMZN) pioneered and then legitimized the idea of third-party cloud computing and storage services. But most owners of AMZN stock have also been also legitimately worried that it was only a matter of time before competitors caught up with — and then surpassed — Amazon in this red-hot market.
Case in point: In a poll recently taken by Morgan Stanley, Amazon.com’s market share in the cloud service market was expected to peel back from its current 31% to only 29% within three years. Conversely, cloud computing tool/service Azure, from Microsoft Corporation (NASDAQ:MSFT), was projected to grow its cloud market share from 11% now to 31% then, just eclipsing Amazon Web Services (AWS).
As for why, the answer is clear, but difficult to articulate. Broadly speaking, users feel the iconic business software company is willing and able to think like its customers — other businesses. While AWS serves business customers of its own, its software and offering don’t quite cater to their unique needs as seamlessly as Microsoft’s.
That, however, may be about to change.
Amazon.com Has an Ace Up Its Sleeve
The bulk of the heroic runup Amazon stock has dished out since the end of 2014 has been on the heels of the explosive growth of Amazon Web Services. Whereas its e-commerce business has grown from $23.3 billion in the third quarter of 2015 to $29.5 billion as of the most recent quarter, AWS revenue has soared from $2 billion in Q3 2015 to $3.2 billion in Q3 2016. That difference in growth rates has been the norm for a while.
Moreover, Amazon Web Services has produced the vast majority of profits the company has been reporting of late. Indeed, last quarter’s earnings of 52 cents per share of AMZN stock would have been a loss of roughly 60 cents per share without Amazon Web Services’ contribution.
Most quarters aren’t quite that extreme, though the decided benefit of Amazon Web Services is the new norm.
Either way, the cloud market is maturing, and as it does, uses of the cloud are evolving.
That had been a liability for Amazon.com, which served its customers well with low-cost solutions and reliability, but wasn’t able to provide some of the higher-level applications of cloud-computing — things like machine learning and artificial intelligence.
All of that quietly changed in late November.
At the re:Invent event last week, Amazon Web Services CEO Andy Jassy unveiled three new products — call them evolutions — it would be adding to its AWS offering:
- Amazon Rekognition allows for visual recognition, in real time.
- Amazon Polly is a text-to-speech service ultimately driven by deep learning.
- Amazon Lex (the platform that powers Alexa devices) will empower app developers to utilize text and conversational instructions from users.
It’s still not entirely clear exactly where these tools will take technology, or the organizations that use it. But Raju Gulabani — vice president of databases, analytics and AI for AWS — painted a fairly compelling picture in an official company statement on the matter:
“The combination of better algorithms and broad access to massive amounts of data and cost-effective computing power provided by the cloud is making AI a reality for application developers. Thousands of machine learning and deep learning experts across Amazon have been developing AI technologies for years to predict what customers might like to read, to drive efficiencies in our fulfillment centers through robotics and computer vision technologies, and to give customers our AI-powered virtual assistant, Alexa.”
It’s clear these tools differ from the functionality focus Microsoft and its ilk bring to the cloud market. Perhaps more than anything, though, the introduction of these machine-learning tools will push AWS back into the limelight it seemingly wasn’t prepared to be in just a few weeks ago.
Bottom Line for AMZN Stock
It’s a rarity that yours truly deems any company is a buy simply because of one new product or service.
It’s rarer still when I suggest AMZN stock is a buy (for a myriad of reasons).
In this particular case though, this seemingly subtle step may well actually be a game-changer, differentiating Amazon’s most fruitful venture from other cloud players rather than making AWS more like its competition. It’s a smart move, and it comes at a time when Amazon was likely to start losing business to the likes of Microsoft.
A bullet-proof product? No. As I noted, there’s still the nagging question of clearly identifying the benefit of Amazon’s artificial intelligence products. What does a user specifically “do” with it?
But to the extent voice-based assistants are truly becoming assistants (in our homes, in the car, and at work), AWS just stepped up its game. That’s likely to drive an oversized boost for AMZN stock.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
