Amazon Faces Growing Competition in Cloud Market

(Bloomberg) – Amazon.com Inc.’s cloud division has been a significant driver of its stocks for nearly two decades. However, increasing competition from companies like Microsoft Corp. and Oracle Corp. is putting pressure on its growth.

The rise of artificial intelligence has created a surge in demand for major cloud providers, with Amazon Web Services currently holding the largest market share. Following closely are Microsoft’s Azure and Alphabet Inc.’s Google Cloud Platform. Also noteworthy is Oracle’s impressive growth, suggesting it may be a key player moving forward, while Coreweave Inc. is starting to attract investor interest.

Amazon’s challenges are highlighted by its declining stock valuation. Currently, it trades at about 25 times its estimated revenues for the next year, which is approaching a significant discount compared to the Tech Heavy Nasdaq 100 Index. In contrast, Oracle trades at around 40 times its revenue, reflecting the highest P/E ratio since the Dot-Com era. Microsoft is not far behind, with its stock at nearly 32 times its ten-year average.

Alphabet’s shares are trading at 22 times their expected revenue, which is somewhat above the company’s long-term average but still not as high as Amazon’s multiple, with a wider gap than before.

The expanding market for cloud services hints at potential coexistence among these players. However, for Amazon, the increased competition is a real concern. AWS contributes over half of the company’s operating profit, and its recent cloud revenue growth has lagged behind that of Microsoft and Alphabet. The forecasts for operating profits have also worsened.

“The second quarter revealed a clear warning that AWS was falling behind Azure in AI workflows, and it is now facing even more competition from Oracle and Coreweave,” one analyst noted.

While these competitors are likely to maintain their leadership positions in the coming years, Amazon may start to fall behind, as there hasn’t been a significant uptick in its backlog related to AI, according to the analyst. “We haven’t seen that same kind of acceleration yet,” she added.

Since Oracle offered an optimistic outlook on September 9, its shares have risen about 20%. During the same period, Amazon’s stock has dropped by 7.4%, while Microsoft gained 4.3% and Alphabet climbed 2.2%. This year, Amazon is trailing its competitors and is only marginally positive for 2025.

Oracle’s upward momentum is understandable, attributed to major AI computing contracts it has secured. Reports from the Wall Street Journal suggest a deal with OpenAI worth $300 billion over five years, as well as ongoing discussions for a $20 billion cloud project with Meta Platforms Inc.

Looking ahead, analysts predict Amazon’s cloud market share could decline steadily from around 35% in 2022 to below 20% by 2025, with Microsoft expected to overtake it by 2029. Oracle is also anticipated to grow its share to 12% by 2030, while Alphabet will remain in single digits.

This competitive landscape is making investors skeptical about cloud businesses in general. “There’s intense competition among cloud providers, and as long as pricing remains a key strategy for maintaining market share, profitability may suffer,” said Brian Kersmanc, a portfolio manager. “Oracle has shown impressive growth figures, but their steep discounts complicate our enthusiasm about the space.”

Of course, Amazon’s lower multiples might cushion against stock declines, especially if the cloud market continues its expected growth trajectory. This growth could mitigate the impact of a shrinking market share as more entrants come online. Bloomberg Intelligence forecasts the cloud infrastructure market could grow by 27% annually, potentially exceeding $1.3 trillion by 2030.

“Oracle’s rise presents a challenge for established players, but the robust cloud market can accommodate new participants,” an analyst commented. “With rising demand, companies should compensate for decreased volume.” Interestingly, given the buzz around AI and potential market fluctuations, the current multiples appear surprisingly modest, suggesting room for further market growth.

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