Slowing AWS Revenue Growth Is Dragging Amazon Stock Down

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Shares of Amazon (NASDAQ:AMZN) have underperformed other mega-capitalization technology companies this year. Up until the last couple of days, Amazon has not been doing much of anything this year.

Source: Rocky Grimes / Shutterstock.com

On Dec. 26, the company announced record sales for this holiday season and the stock subsequently moved up over 4%.

Even with that move, Amazon has still underperformed other mega-cap technology companies since reporting second-quarter earnings.

Amazon Web Services

Amazon Web Services, or AWS, has been a driver of income growth for Amazon. However, after examining the data, AWS revenue growth is slowing and AWS operating income growth is also slowing. The following charts have data collected from Amazon earnings press releases over the past three years.

The below table shows that AWS sales and operating margins have continued to show growth, but that growth is slowing. The reason I chose second-quarter earnings for the performance comparison above is the data found in the below table.

As you can see, in the second and third quarters of 2019, AWS operating income growth was below the level of revenue growth for AWS. This is the first time that this occurred in recent years. And it’s likely the cause of the lagging share price for Amazon. In addition, the operating margin for AWS has fallen over the past year from 31.1% in Q3 2018 to 25.1% in Q3 2019.

Source: Chart by Brad Kenagy, all data in millions

You may be wondering why I am focusing on AWS?  While AWS accounts for only about 13% of total sales for the company, it accounts for over 70% of the company’s operating income. If AWS sales growth continues to decelerate, it could create a big problem for AMZN stock.

Source: Chart by Brad Kenagy, all data in millions

Looking to the Future

The potential for continued slowing growth along with increased costs from offering one-day delivery could give the market pause about the current valuation of Amazon. One solution to help alleviate this issue would be for Amazon to make a needle-moving acquisition. However, given the current regulatory environment — which could become even more stringent based on 2020 election results — Amazon might not be able to carry out such a deal.

These acquisitions would certainly draw attention from regulators, so Amazon may be boxed in. For instance, late last week, Amazon received extra scrutiny from United Kingdom regulators on its recent investment in food delivery service Deliveroo.

Bottom Line on AMZN Stock

I believe that the bottom line for AMZN stock is for the market to take a wait-and-see approach given potential headwinds. When Q4 earnings are released, the one thing to take note of is if the trend in slowing AWS revenue and operating income growth is continuing.

As of this writing, Brad Kenagy did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2019/12/slowing-aws-revenue-growth-amazon-amzn-stock/.

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