- Amazon is the market leader in the cloud services market with a bigger market share than Google, Microsoft, Salesforce and Rackspace.
- Amazon web services, once perceived as a stable growing revenue stream now experiences extreme difficulties driven by a decline in revenues and increased competition.
- As the big data and cloud services market are rapidly growing, they can be easily impacted by relatively minor events. Amazon investors should track the sentiment around the big data software vendors.
Amazon (AMZN), the eCommerce giant and Internet infrastructure provider, reported its Q3 2014 results at the end of October with disappointing revenues and earnings. Amazon reported a third-quarter revenue of $20.6 billion, which reflects a 6% increase in quarter-over-quarter revenue and a 20% increase in year-over-year revenue. Even though Amazon’s revenue seems positive at first glance, they were $0.25 billion below analysts’ expectations, triggering an 8% decline in stock price.
Amazon stock price has lost 23% of its value since the beginning of the year, mainly due to the Fire Phone failure, increased competition in the eCommerce market, and an inability to drive sustainable profitability. AWS, Amazon’s web services division, has always been the company’s leading emerging revenue stream and was able to increase each quarter from 3% of overall revenues in Q1 2012 to 6% of overall revenues in Q3 2014. AWS only generates around $1 billion, which, in Amazon’s terms, is not much, but the business increases at an impressive rate and is considered to be the market leader in the infrastructure as a service (IaaS) market, providing the infrastructure for many cloud applications.
As shown in Chart 1 below, Amazon quarterly revenues increased at a quarterly rate of 6% and experienced instability and fluctuations due to the unstable revenue growth in the media, electronic, and general merchandise segments. Within the overall Amazon revenues, AWS revenues grew faster than any other segment with a 10% quarterly growth rate from Q1 2012.
AWS’s strong positioning was slightly affected by the negative growth in Q2 2013, with a 3% decrease quarter-over-quarter compared to the 12% and 11% increases AWS delivered in Q2 2012 and Q2 2011, respectively. AWS’s disappointing results in Q2 2014 added to the overall disappointing results, with a 2% quarter-over-quarter decrease driven by the media segment´s 11% decrease and AWS´s 3% decrease. In Q3 2013, AWS presented a 13% quarter-over-quarter increase, which is the same rate as in Q3 2012. However, the negative sentiment at Amazon is now fueled with another problem, the increased competition in the IaaS market.
Synergy Research published an IaaS market overview a week after Amazon’s earnings release, with alarming information for Amazon. According to the report, although Amazon still dominates the cloud services market, Microsoft (MSFT) is closing the gap rapidly, increasing Azure revenues at an annual rate of 136% and gaining 10% market share.
As shown in chart 2 below, IBM, Google, Salesforce, and Rackspace also increased their market shares and positioned as smaller competitors to Amazon and Microsoft. Amazon still leads the pack with a 27% market share; however, the rapid growth of Microsoft Azure poses a real threat to AWS.
According to the historical trend, AWS is expected to grow its revenues in the fourth quarter of 2014 by more than 20% to almost $1.5 billion, which may be a primary factor in Amazon’s earnings result as the company provided guidance that reflects almost a 40% quarter-over-quarter revenue increase and a 12.5% year-over-year increase. Big data software is still a mega trend in the technology sector, and Amazon is currently one of the most influential players in that market as the leading cloud services provider. If Amazon loses its dominance in this market to Microsoft, it may create a negative sentiment around AWS that could drive more customers to the competition and could result in Amazon losing not only market share but AWS revenues in a hot and growing market. That impact is much bigger than AWS revenues in a particular quarter, and Amazon should do its best to protect its turf.
Amazon’s major competitor in the cloud services market, Microsoft, is closing the gap at an incredible pace that should worry every Amazon investor. AWS is perceived as a reliable and stable emerging revenue stream; however, investors interested in Amazon because of its presence in the big data market should pay careful attention to any development, not only in AWS but also in Microsoft Azure, Google Cloud, and the big data software vendors. In such a rapidly growing market, even the slightest event can change the market interaction and could impact Amazon stock price. As the competition is closing in, Amazon investors should be ready for such an event.
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