Here’s the bullish case for AWS’s Q2: the cloud-infrastructure leader generated revenue of $22.1 billion on 12% growth, with Amazon CEO Andy Jassy saying AWS’s long and steep growth decline “stabilized” in the quarter.
But now let’s look at the not-so-bullish side: While primary rivals Microsoft Cloud and Google Cloud matched in Q2 their growth rates from Q1, AWS saw its growth rate fall significantly for the seventh straight quarter.
Here are the numbers from Q4 of 2021 through the just-reported Q2 of 2023:
- 40%, 37%, 33%, 27%, 20%, 16%, 12%
On top of Q2 extending that streak, Amazon would not offer any guidance on what sort of growth rate it expects for AWS in Q3, a reticence I found surprising given the great lengths Jassy went through during last week’s Q2 earnings call to make the case that the growth-rate decline had “stabilized.”
Here’s the context for that comment from Jassy on the call: “While customers have continued to optimize during the second quarter, we’ve also started seeing more customers begin to shift their focus toward driving innovation and bringing new workloads into the cloud.”
“As a result, AWS’ revenue growth rate has stabilized during Q2 in which we reported 12% year-over-year growth.”
At the same time, it’s only fair to fully acknowledge AWS’s remarkable achievement for Q2: a business with a run rate of $88 billion that was able to generate 12% growth even at that scale. In every other industry in the world, that would be regarded as an extraordinary and probably best-in-class achievement. So hats off to AWS for that.
However — and this is a very big however — AWS is not playing in some other industry and is in fact one of the leading companies in the Cloud Wars, which as I’ve said more than a few times in the greatest growth market the world has ever known. As such, the normal rules don’t apply, particularly as we recently saw Microsoft report that Q2 revenue for its much-larger cloud business grew 21% to $30.3 billion.
In that light, the rationale offered by Jassy and CFO Brian Olsavsky for AWS’s long growth decline doesn’t stand up — if it did, then how could a much larger cloud business ($30.3 billion versus $22.1 billion) grow at a much higher rate (21% versus 12%) during the exact same quarter?
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Here’s how CFO Olsavsky explained it during the Q&A portion of the call.
“If you rewind to our last conference call [in April for Q1], we saw 16% AWS revenue growth in Q1, with growth rates that had been dropping during the quarter.
“And what I mentioned was that April was running about 500 basis points lower than Q1. But in Q2, we’ve seen a stabilization, and so you see that final 12% growth,” Olsavsky said.
He then attempted to put that 12% figure in its most-optimistic perspective by explaining that the customer mindset today is changing away from the cost-cutting “optimization” approach of the past year to a willingness to begin spending on new workloads, particularly around generative artificial intelligence (AI).
“So, while that number is 12%, a lot of cost-optimization dollars came out and a lot of new workloads and new customers went in,” Olsavsky said.
“In Q2, we’re seeing that those cost optimizations, while still going on, are moderating and are even finished for some of our large customers. So we’re seeing more progression into new workloads and new business.”
Asked what Q3 might look like for AWS in light of those customer dynamics both he and Jassy cited, Olsavsky said, “We’re not going to give segment guidance for Q3.”
Hey, that’s perfectly fine — every business has the right to decide if it’s going to offer guidance and, if so, in how much detail. But for me, the fact that Amazon chose not to offer Q3 guidance for AWS undercuts the vigorous attempt made by Jassy to make the case that the downward spiral is over, that things have fully “stabilized,” and that AWS’s prospects for future growth look rosy.
As noted above, the performances of the Cloud Wars Top 10 companies over the past several years have been so extraordinary that they can at times make us forget that the rest of the business world does not operate at anything close to these levels. So yes, Jassy and team have every right to be proud of a company with a run rate of $88 billion and a growth rate of 12%.
But at the same time, relative to its peers in the Cloud Wars, AWS is not faring so well. Yes, it’s the undisputed leader in the massive infrastructure segment of the cloud, but the cloud has become much, much more than infrastructure. And it’s in those other primarily software-centered portions of the cloud where AWS’s rivals are grabbing share.
It was once unthinkable that any company could rival — let alone overtake — AWS in the cloud. Yet Microsoft has done exactly that, with a cloud business that is now almost 40% larger than Amazon’s! And I have no doubt that Google Cloud and Oracle are grabbing lots of customers that only a couple of years ago would have happily gone to AWS.
Maybe the new GenAI services and technologies Jassy emphasized in great detail on the Q2 earnings call will provide the reacceleration the company’s so eagerly seeking. The problem with that scenario is that for all of the expertise AWS has built up around large language models (LLMs) and AI in general in the past several years, its rivals — Microsoft and Google and Oracle — have all been into those technologies much more deeply for a much longer period of time.
So while AWS will certainly find a way to be a significant player in the new world of GenAI, I expect them to trail behind those other companies in winning the hearts, minds, and wallets of GenAI buyers.
And so for AWS, perhaps “stabilized” is going to be as good as it gets in the Cloud Wars of late 2023 and beyond.
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