Is Amazon’s Cloud Business Headed for Stormy Weather?

When it comes to Amazon (NASDAQ:AMZN) stock, a major driver has been the cloud business (known as Amazon Web Services or AWS ). It has not only provided strong revenue growth but has been highly profitable. Because of all this, AMZN has been able to fund its other businesses, such as for healthcare, streaming and so on. But the cloud business is starting to sputter. And this could be problematic for AMZN stock.

Is Amazon's Cloud Business Headed for Stormy Weather?
Source: Ioan Panaite /

The latest piece of bad news: The company lost out on the bid for the Defense Department’s cloud project. Called JEDI (Joint Enterprise Defense Infrastructure), it could be worth as much as $10 billion over the next decade. The winner was Microsoft (NASDAQ:MSFT), which has been aggressively ramping its cloud business.

Now AMZN has said it will dispute the result. According to the company: “AWS is uniquely experienced and qualified to provide the critical technology the U.S. military needs, and remains committed to supporting the DoD’s modernization efforts. We also believe it’s critical for our country that the government and its elected leaders administer procurements objectively and in a manner that is free from political influence. Numerous aspects of the JEDI evaluation process contained clear deficiencies, errors, and unmistakable bias — and it’s important that these matters be examined and rectified.”

No doubt, this is an veiled shot at President Donald Trump, who has not been shy in his hostility toward Amazon CEO, Jeff Bezos (who also owns The Washington Post). In July, he called for an investigation of the JEDI contract. Oh, and Jim Mattis — the former Defense Secretary — in his memoir wrote that the President instructed him to “screw Amazon.” But like others in the Trump administration, he did not follow up on this.

Despite this, it may be tough to undo the decision from the federal government. Agencies, including The Pentagon, have quite a bit of latitude and discretion on such matters.

But I also think there is something else to consider: Microsoft’s own cloud platform, called Azure, is a viable alternative to AWS. The DoD issued a statement, which said, “This contract will address critical and urgent unmet warfighter requirements for modern cloud infrastructure at all three classification levels delivered out to the tactical edge.”

Microsoft’s Very Real Threat

Since taking the CEO post in 2014, Satya Nadella has been laser focused on making Microsoft a dominant player in the cloud market. He has leveraged the company’s enormous resources, such as the Office and Windows franchises. He has also pulled off savvy acquisitions, namely GitHub and LinkedIn.

And yes, there has been much innovation of the core Azure platform, which saw revenue growth of 59% during the latest quarter. In fact, the company recently snagged a major deal with SAP (NYSE:SAP), which will make Azure its preferred cloud system.

A key part of the strategy is AI — artificial intelligence — which allows for much better insights for customers. Azure already has more than 20,000 customers that use the technology, which includes over 85% of the Fortune 100. To get a sense of this, CVS’ (NYSE:CVS) Humana division uses AI for personalized healthcare solutions for more than 10 million members.

According to Nadella, on the latest earnings call: “The quintessential characteristic of every application going forward will be AI, and we have the most comprehensive portfolio of AI tools, infrastructure and services.”

Bottom Line on the Amazon Stock Price

Now it’s true that AWS is positioned nicely to benefit from the mega cloud wave. The other good news for AMZN stock is that the company has kept focused on innovation. Some of the latest launches include: Amazon Forecast (a sophisticated system that’s based on machine learning and has up to 50% more accuracy versus traditional methods); AWS Lake Formation (this makes it easier to build and secure data lakes); and, Amazon Quantum Ledge Database (a high-performance crypto ledger). In fact, AWS CEO Any Jassy has said that the technology has a two-year lead against Microsoft.

But this may not matter much. Sometimes the technology only needs to be good enough — not superior. Consider that customer requirements are quite complex and AWS is definitely not good at everything. What’s more, there is a need for having less dependence on Amazon when it comes to mission critical processes.

Microsoft is also not the only threat. Alphabet (NASDAQ:GOOGL) is also getting traction and so is IBM (NYSE:IBM), with its transformative acquisition of Red Hat.

For the most part, it’s a good bet that for Amazon stock, the magic of AWS will continue to lose it luster. It seems inevitable. Unfortunately, even though the company is involved in a myriad of businesses, none comes even close to what AWS has provided.

Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical IntroductionFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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