Amazon's Cloud Business Soars 7%, Setting Stage for AI Showdown With Microsoft

Amazon.com saw a 7% rise in its stock on Friday, driven by accelerated growth in its highly profitable cloud business. The e-commerce giant intends to secure a larger share of the thriving artificial intelligence market, putting it in direct competition with tech giant Microsoft.

Cloud Expansion and Market Potential

With its last traded share price of $128, Amazon was on track to increase its market capitalization by almost $90 billion. Meanwhile, Microsoft, its smaller cloud rival, experienced a 1.5% growth, while Alphabet faced a slight decline of about 1.3%.

Amazon CEO Andy Jassy expressed confidence in the cloud business, noting its stabilization and potential for growth in the coming months. Jassy also emphasized the significant opportunity for Amazon Web Services (AWS) in the AI sector, foreseeing "tens of billions of dollars in revenue over the next several years."

Positive Market Response and Analysts' Outlook

Wall Street reacted positively to Jassy's comments, with Bernstein analysts stating that "AWS growth sounds ready to re-accelerate even without AI," according to Reuters. Approximately 26 brokerages raised their price targets on Amazon stock, pushing the median view to $173, as reported by LSEG data.

Despite recent fluctuations, Amazon shares have rallied approximately 40% this year, noted the Times of India. However, Alphabet's warning that cloud customers were reducing spending resulted in an 8% loss in the past two days.

In the July-September quarter, Amazon saw its first increase in cloud growth in nearly two years. Although the 12.3% growth of AWS fell slightly short of expectations, it remains a strong contender in the cloud race, trailing behind Microsoft's Azure and Google Cloud.

When comparing valuation ratios, Amazon trades at 38.49 times its 12-month forward earnings estimates, while Microsoft's ratio stands at 27.85 and Alphabet's at 18.66. While Amazon's cloud business is larger than that of Microsoft and Google, it is considered a laggard in the AI market, dominated by Microsoft's emphasis on big clients and its investment in OpenAI.

Recognizing the need to bridge the AI gap, Amazon signed a multi-billion dollar deal in September to invest in Anthropic, a leading chatbot maker. Additionally, the company launched its Bedrock AI service, attracting thousands of customers and showcasing its commitment to closing the AI race divide.

Photo: Yender Gonzalez/Unsplash