Amazon Faces Increased Scrutiny on Cloud Ambitions Amidst Tech Sector Sell-Off

Amazon.com (AMZN) is under pressure to meet elevated expectations for its cloud computing performance in its fourth-quarter results, scheduled for release on Thursday. The announcement follows lackluster reports from Microsoft (MSFT) and Google (GOOG), which have dampened investor confidence in Big Tech's substantial investments in AI.

Previously, major tech stocks surged due to the belief that AI technologies' extensive datacenter needs would drive investment growth. However, Chinese startup DeepSeek's claims of achieving AI breakthroughs at reduced costs have triggered a correction in technology stocks.

Despite the market sentiment, analysts suggest Amazon may be better positioned than competitors to capitalize on cheaper AI due to its robust cloud business and limited exposure to expensive large-language models. Amazon Web Services (AWS), the leading cloud services provider, is forecasted to report its highest revenue growth in eight quarters, at 19.3%, according to LSEG data.

While Microsoft and Meta recently faced pressure to justify their AI spending, Google's parent company, Alphabet, experienced an 8% stock decline after announcing higher-than-expected capex.

"Microsoft and Google's results have intensified the focus on Amazon's cloud growth," said Dave Wagner, portfolio manager at Aptus Capital Advisors, which holds stakes in all three companies. "A strong cloud performance from Amazon would be welcomed by the market."

Amazon was among the first major cloud providers to adopt DeepSeek's AI models last month and has indicated that its capital spending, primarily focused on AI, will surpass the previously estimated $75 billion for 2024.

Analysts anticipate AWS's performance to be influenced by moderation in growth reported by Microsoft Azure and Google Cloud, the second and third largest cloud players.

"Capacity constraints cited by Microsoft and Google suggest that Amazon may also have faced similar challenges, limiting its growth rate," said Bob O'Donnell, chief analyst at TECHnalysis Research.

Conversely, some analysts perceive the struggles of competitors as an indication of Amazon's progress in the AI race, citing its increased investment in Anthropic and a diversified range of AI models on its cloud platform.

"We believe AWS is regaining market share," said Gil Luria, analyst at D.A. Davidson. "Amazon's improved AI offerings may have mitigated its deceleration compared to Azure and Google Cloud."

Amazon's valuation remains higher than its peers, with a forward price-to-earnings ratio of approximately 39, compared to Microsoft's 29 and Alphabet's 22.4, as per LSEG data.

Beyond cloud computing, Amazon's retail business is expected to contribute to its fourth-quarter performance after a promising holiday shopping season. Forecasts indicate a 9% year-over-year increase in Amazon's North American sales for the quarter.

After a lull in online sales earlier this year, analysts predict a resurgence in Amazon's retail operations, which have significantly influenced its post-earnings stock movements in recent quarters.

Data from Adobe Analytics indicates a surge in US online spending between November and December 2024, exceeding $240 billion, driven by discounts across various categories. The holiday spending growth rate of 8.7% doubled the 4.9% recorded in 2023.

Amazon has also focused on enhancing delivery times and expanding product offerings, encompassing grocery, pharmacy, and fashion. These initiatives are anticipated to drive growth, as noted by Luria: "Indications suggest a strong quarter. The consumer had a good holiday season, so it's plausible that Amazon will have performed well on that business side."