Sign of stress or just business as usual? AWS sales are off slightly

17 Comments

Could Amazon(s amzn) Web Services be feeling the heat from new public cloud competitors? Maybe. Maybe not. Second quarter net sales of AWS — or at least the category in which it is embedded–  were off about 3 percent sequentially to $1.168 billion from $1.204 billion for the first quarter. But they were up 38 percent from $844 million for the second quarter last year. In the first quarter, growth in this category year over year was 60 percent. So make of that what you will.

Overall, the online retailer posted a second quarter loss of $126 million or 27 cents a share on revenue of $19.34 billion for its first quarter ending June 30. A survey of analysts by FactSet had expected Amazon to lose 16 cents per share on  $19.3 million in sales, according to Marketwatch. 

Of course, profit has never been a focal point for Amazon CEO Jeff Bezos, who has shown a willingness to put up with short-term thin margins in service of dominance. Amazon is investing in a big new phone effort, drones, and grocery delivery after all.

But back to cloud: as Google(s goog) and Microsoft(s msft) — both with deep pockets and technical benches — bring more public cloud services online, customers have more than one place to shop.

Those vendors have shown themselves willing meet Amazon price cut for price cut. And, if you don’t think they’re going after big AWS accounts, you’ve got another think coming. But they still have ground to make up — Amazon has a good 8-year head start and still offers many more (and more high-end) services than the other big boys.

 

Note: This story was updated to reflect that year-over-year sales growth of the category including AWS grew 38 percent, not 32 percent. 

17 Comments

Justin D Kintzele

At a glance there seems to be a pattern of either slightly downward, or flat sales between Q4 of one year, and Q1 of the next in this graph. Am I seriously the first one to spot that trend?

Anon

I know a AWS customer who left AWS and they were paying $1.2M/Month! AWS is still too expensive. Go run a real production application and you will find out :-)

AWS is good when doing POC/Product-Market fit. Later, need to go on own, for cost vs performance!

markcreamer

As the infrastructure underlying Amazon e-tailing, AWS is merely a cost defrayment mechanism. AWS would be there, and would grow as a platform, regardless of financial performance (which is entirely speculative anyway given the lack of transparency). Benchmarking AWS vs. a normal line of business like Azure, RAX, Google Cloud, IBM/SL et al is missing the point.

jhesr

Surely you are joking? Of the companies you list almost all of them have a better hand to play than AMZN when it comes to utilizing their own infrastructure.

MSFT has their software, Google has their search, IBM is actually almost as large a software company as Oracle and SAP, not to mention the largest IT services company in the world. The only one on your list worse off than AMZN in this instance is RAX.

MSFT, GOOG, and IBM are also all extremely profitable companies where as AMZN makes zero/negative profits every quarter fort 20 years running.

AMZN is a bubble stock with a P/E of 500+. It is going to crash and burn at some point as all bubble stocks do.

Jason McKenzie

At some point they have to show investors the money. They have done an amazing job, but with margins that thin, competition heating up, and being on the wrong PR side of the Hachette debacle, they are not immune forever to a large-scale pull-out. If they don’t decide what company they really want to be (IT or retail), this seems more and more likely.

larry

Said it in the past: public cloud makes no money b/c they have to constantly cut the price to compete w/ other vendors. The end result is a price war that no one can profit. They need to offer some kinda unique services to edge out otherwise they’d go the way of PC OEMs – perennial price war and little profit.

Justin Cormack

Instagram left AWS this quarter to go in house at Facebook, probably was a decent chunk of revenue.

Barb Darrow

i’m sure it was….i think even if you plan to stay w/ aws you’d be nuts not to use goog or msft as a lever to get better t&cs from aws.

Cloud Insider

Nah. AWS has many customers much larger. Instagram revenue loss doesn’t impact much at all in terms of %. The reason is because of the massive price cuts that went into effect early April. Adoption continues to increase, but a 30-50% price cut does have an impact.

mreferre

> Adoption continues to increase, but a 30-50% price cut does have an impact.

Is that a good or a bad thing for AWS? :)

Cloud Insider

It is a good thing. Gotta have long term thinking. Cloud is the market of the future. It is still early stages. It is critical to grab market share (while still staying profitable as a BU). Also the price pressure will drive the legacy vendors with higher cost basis out of the market. So over the long term imo it is good for AWS (and GCE). Not good for the rest that have higher costs and can’t keep up with the price cuts.

mreferre

Yes but in a price war to the bottom you can’t go below 0 and even at 0 you are not making a lot of profits as a BU. Surely this could be the foundation to sell higher value services but if you make 0$ out of EC2/S3 it isn’t like all the remaining 30 services AWS has are giving you a lot of profits either (today). For the records this is the same problem/opportunity VMware has with vSphere.

Cloud Insider

Not zero. But, as Jassy has said earlier, yes, AWS does like low margin, high volume businesses. AWS is comfortable with it. AWS has some unique advantages (low cost basis, long term culture etc) that positions it well to succeed in such businesses.

I don’t think VMWare is setup to compete in this type of low margin/high volume business. It requires high end hardware (leading to high cost basis) even to match AWS’s reliability and durability, and unlike Amazon, VMW stock will get slaughtered if it does not continue to generate high profits. Neither are most legacy tech vendors (IBM, HP etc) setup to compete in this market.

Imo it is good to have some unique advantages that positions a company well to continue to be the leader in the hottest growth market in IT for the foreseeable future.

jhesr

You do realize that Amazon will not be allowed to go on making zero or negative profits forever? I’m not sure I would consider the currently passive AMZN shareholder as a strategic advantage. With a P/E of 500+ if revenue growth slows down to even 10% per quarter it would be a disaster.

mreferre

IMO Amazon’s challanges to win in the Enterprise aren’t any less than the VMware challanges to win in the “cloud native” space.

I disagree wih “[VMware] requires high end hardware (leading to high cost basis) even to match AWS’s reliability and durability, and unlike Amazon”

But I do agree with “VMW stock will get slaughtered if it does not continue to generate high profits” (albeit the -10% of the AWS stock at the opening on Friday sends the message that investors’ patient may be over).

It’s ok to agree to disagree…. after all we are both biased (we should disclose that).

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