AWS was one of the company's worst-performing segments in the fourth quarter.
Amazon (AMZN 1.07%) 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, 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.
FAQs
Since launching in 2006, Amazon Web Services has been providing world-leading cloud technologies that help any organization and any individual build solutions to transform industries, communities, and lives for the better. As part of Amazon, we strive to be Earth's most customer-centric company.
What percentage of Amazon's income is AWS? ›
AWS accounts for 17% of Amazon's $143,313 billion in overall revenue. Cloud is also a reliable source of profit for Amazon, thanks to high software margins. AWS delivered $9.42 billion in operating income, or about 62% of Amazon's total.
What category is Amazon Web Services under? ›
AWS (Amazon Web Services) is a comprehensive, evolving cloud computing platform provided by Amazon. It includes a mixture of infrastructure-as-a-service (IaaS), platform-as-a-service (PaaS) and packaged software-as-a-service (SaaS) offerings.
What are the risks of using Amazon Web Services? ›
Storing data in AWS services such as S3 buckets, EBS volumes, and RDS instances without proper encryption is a significant security risk. Unencrypted data can be easily accessed by unauthorized parties if these services are compromised, leading to data breaches and compliance violations.
What is Amazon Web services responsible for? ›
AWS responsibility “Security of the Cloud” - AWS is responsible for protecting the infrastructure that runs all of the services offered in the AWS Cloud. This infrastructure is composed of the hardware, software, networking, and facilities that run AWS Cloud services.
What is the difference between Amazon Web Services and Amazon? ›
Amazon Web Services, Inc.
(AWS) is a subsidiary of Amazon that provides on-demand cloud computing platforms and APIs to individuals, companies, and governments, on a metered, pay-as-you-go basis.
Who is the CEO of Amazon AWS? ›
Adam Selipsky, 57, who is also a member of Amazon's team advising CEO Andy Jassy, will leave the company on June 3, according to an Amazon statement Tuesday. He will be replaced by Matt Garman, a senior vice president who has overseen sales and marketing at AWS.
How much of the internet runs on AWS? ›
That means nearly one third of the internet is running on Amazon's AWS. And it doesn't appear that Amazon will step down from its cloud throne anytime soon. Amazon's sales from AWS soared 10X in the past six years. And last year, Amazon reported a bigger sales gain from AWS (dollar-wise) than any other cloud company.
Is Amazon Web Services a public cloud? ›
The AWS public cloud
In the public cloud space, AWS provides services such as the Amazon Elastic Compute Cloud (Amazon EC2), which provides infrastructure and services over the public internet and are hosted at an identified AWS Region (for example, Canada Central ).
What happens if you don't pay Amazon Web Services? ›
After a point of time your account will be locked and will not be accessible to you. Any instance present will not be terminated immediately but after a period of time. After which your account will be terminated for good. I have had two accounts of mine terminated due to non-payment.
Benefits of AWS security
Keep Your data safe — The AWS infrastructure puts strong safeguards in place to help protect your privacy. All data is stored in highly secure AWS data centers. Meet compliance requirements — AWS manages dozens of compliance programs in its infrastructure.
Why do I need Amazon Web Services? ›
AWS is designed to allow application providers, ISVs, and vendors to quickly and securely host your applications – whether an existing application or a new SaaS-based application. You can use the AWS Management Console or well-documented web services APIs to access AWS's application hosting platform.
Is AWS linked with Amazon? ›
Amazon Web Services (AWS) is the world's most comprehensive and broadly adopted cloud, offering over 200 fully featured services from data centers globally.
Is AWS a wholly owned subsidiary of Amazon? ›
Both AWS and AWS Europe are wholly owned subsidiaries of Amazon.com, Inc.
Is Amazon Web Services bigger than Amazon? ›
Amazon overall generated $24.8 billion in operating profits in 2021, and AWS was responsible for $18.5 billion (or 74%) of it. Basically, a business segment that contributes 14% of overall revenue is generating roughly three-quarters of Amazon's total operating profits.
Who is AWS' biggest competitor? ›
Top Amazon Web Services Alternatives
- Microsoft Azure.
- Google Cloud Platform.
- IBM Cloud.
- Oracle Cloud Infrastructure.
- VMware Cloud on AWS.
- Huawei Cloud.
- Alibaba Cloud.
- DigitalOcean.
 a Liability for Amazon? | The Motley Fool (2024))
