While Amazon had a rocky year, AWS remains a reliable cash cow

Back in March 2020, when the world shut down, Amazon became the world’s go-to online store. When people couldn’t leave their homes, it became imperative to have goods come to them, and Amazon thrived. Money poured into its coffers, its stock price skyrocketed, and it hired like crazy and built warehouses to match the growing demand.

According to numbers from Statista, the company began the pandemic with approximately 840,000 employees in the first quarter of 2020. By Q1 2022, it had over 1.6 million workers. The problem was, as the pandemic loosened its grip on public life, people stopped buying everything online and returned to brick-and-mortar retail.

Amazon CEO Andy Jassy certainly seems to understand that the market has changed, and he has been having his managers look for places to cut spending and reduce operating costs, something many large organizations are doing amid a period of great economic uncertainty.

Amazon’s efforts included, if reports are accurate, cutting up to 10,000 jobs in the near term to offset the hiring that happened during the peak of the pandemic.

From a stock perspective, the company has given up almost all of the gains it picked up on the back of the pandemic, losing almost 50% of its value this year, per CNBC. That means Jeff Bezos is just a little less rich than he once was and his ex, MacKenzie Scott, has a little less to give away. Jassy, meantime, has many more headaches to deal with and pressure to cut operations costs.

Through all this, AWS, Amazon’s cloud arm, which Jassy ran before he got promoted to the corner office, has continued to perform at the same high level it always has. But even AWS reported a slowdown in the third quarter as companies tried to slash cloud costs.

Consider that in Q3 2022, the most recently reported quarter, AWS revenue hit $20.5 billion, below the $21.1 billion the analyst crowd expected. It may not seem like much, but cloud computing has been one of a few uber-growth areas, so a miss was a big deal.

That said, you can’t lose sight of the fact that AWS is now on a run rate to become an $80 billion business, so that’s not exactly something to hang your head about, and the consensus is that the cloud business still has plenty of room to grow in spite of external macroeconomic conditions.

In other words, AWS will probably be fine regardless of currency issues, slowing growth or customers looking at only modest IT spending increases in the new year. Jassy may have to cut costs across the company, but chances are AWS gets mostly spared from this exercise.

A look at 2022

The fact is that while AWS missed its Q3 revenue target, it did just fine in Q1 and Q2:

You’ll also note that revenue grew from $18.44 billion in Q1 to $19.7 billion in Q2 to $20.5 billion in Q3, a nice steady growth progression, regardless of other factors.

In terms of growth, AWS’ Q3 2022 revenue was up 28% year on year, compared with 33% year-on-year growth in the second quarter.

By comparison, Azure revenue grew 35% in the most recent quarter, down from 40% in the prior one, while Google Cloud was up 38%, up from 35% in the previous quarter. That was good for around $12 billion and $6 billion respectively, according to Synergy. It’s worth noting that these operations came later to the market, and they are growing from a smaller market share, which tends to result in a higher growth rate.

Synergy Research chief analyst John Dinsdale told us that he still sees a company with a strong market position, which is what Synergy tracks. “As far as 2022 is concerned, AWS had a great year. In a market that is huge but continues to grow rapidly, AWS has grown its worldwide market share by over a percentage point in the last four quarters compared to the previous year. Its market share is now standing closer to 34% than 33%.

“It is an impressive feat to increase market share and to maintain leadership in a high-growth market that is so competitive,” he added.

What’s next for AWS?

While Amazon could struggle in the new year as it gets used to existing in a post-peak-pandemic world, all signs point to AWS continuing to grow at a pretty substantial rate, if a bit lower than in the past. But can it maintain its market dominance by innovating and adjusting to a changing cloud market?

As we noted in our AWS re:Invent wrap-up post, the company had fewer bombshell announcements and more incremental changes to existing products, with a few notable exceptions like new custom chips, AWS Supply Chain and Zero ETL products.

Holger Mueller, an analyst at Constellation Research, sees a company in transition to meet the needs of a shifting market. “AWS is discovering depth (and synergies) versus breadth (more services and innovation). This is a multiyear strategy that started in 2022 and will continue for years to come,” he said.

Corey Quinn, chief cloud economist at Duckbill Group, said AWS needs to do more than that to maintain its market position. He wants to see AWS as less a set of disparate tools and more push-button simplicity. He thinks that, overall, AWS is just too difficult for most companies.

“I think that consolidation and moving ‘up the stack’ are important; people want working solutions not a pile of parts that they need to wire together themselves,” Quinn told TechCrunch.

“What the industry is instead crying out for is stuff like ‘a one-click button that registers a domain, stands up a web server of some sort, populates it with the customer’s content, registers a certificate, configures the CDN and doesn’t charge them a bill that’s thick enough for your toddler to use as a booster seat,’” he said.

AWS CEO Adam Selipky seems to understand that. Perhaps his time at Tableau helped him see the power of SaaS and packaged solutions over the toolbox approach. James Sanders, principal analyst for cloud and infrastructure at CCS Insight, said companies are growing more concerned about cost optimization, and Selipsky is trying to address that.

“With Adam Selipsky running the organization, AWS is transforming to a more application-focused model than an infrastructure-focused model. There is a greater revenue opportunity with this approach, but many of the net-new innovations presented at re:Invent are vertically focused, like AWS SimSpace Weaver or AWS Supply Chain. These aren’t necessarily applicable to every potential customer,” he said.

So perhaps we are in a period of transition for AWS, where it becomes more of what Quinn, a seasoned cloud practitioner, hopes to see in the future. It’s clear AWS remains the cash cow for Amazon, and while the retail side of the house may struggle to find equilibrium, AWS continues to roll along, regardless of the economic conditions swirling around it.