Amazon, Microsoft and Alphabet deliver slower cloud growth. Here's how AI could reverse that trend

Published Mon, May 1 202312:25 PM EDT

With investors staring down another big week of tech earnings, last week brought quarterly revenue beats from Club holdings Amazon (AMZN), Microsoft (MSFT) and Alphabet (GOOGL) — despite continued deceleration in cloud growth. However, as each of them leans into artificial intelligence, longer-term cloud prospects look much brighter. The March quarter slowdown in cloud growth was not a surprise. It's been going on for a while now. Wall Street was largely anticipating what indeed played out: high double-digit percentage gains in cloud for each. That would be robust by most standards, but the explosive gains of the past have been waning. Last week, the big three cloud providers in their own ways blamed gathering economic headwinds. For example: "Customers of all sizes and in all industries continue to look for cost savings across their businesses, Amazon CFO Brian Olsavsky said during the company's first-quarter earnings call Thursday evening. "As expected, customers continue to evaluate ways to optimize their cloud spending." The cloud is considered a growth engine for these tech giants, so investors are keenly focused on how things are going in this area. Cloud computing is becoming an essential part of doing business for many companies nowadays, but its adoption is still in its infancy. As more and more businesses of all sizes continue their digital transformations, Amazon, Microsoft and Alphabet aim to be there to provide cloud solutions. Amazon, by far, still held the largest cloud market share at 32% as of Q1, according to Synergy Research Group , which tracks IT and cloud markets. Microsoft was at 23% and Google was at 10%. Here's a look at how each tech company's cloud unit performed in the latest quarter, in market-share order, and how the Club sees their businesses progressing moving forward. AMZN YTD mountain Amazon's stock performance year to date. Amazon's first-quarter beat initially sparked an after-hours stock rallying. However, those gains quickly evaporated as the post-earnings call got underway and Wall Street learned of slowing cloud growth in April , the first month of Q2. Growth in Amazon Web Services (AWS) came in at 16% year-over-year in the first quarter, however, management informed investors during the conference call that growth had slowed materially by about 500 basis points in April as customers continued to optimize spending in the cloud, creating a continued headwind to growth. AWS grew more than 20% in Q4 of 2022 and 27.5% in Q3. Since peak growth in 2015, Amazon's cloud revenue gains have generally been trending lower. Looking ahead, Olsavsky said on the call, "We're continuing to invest in infrastructure to support AWS customer needs, including investments to support Large Language Models [LLMs] and Generative AI." The Club's take: We think the deceleration in AWS is a near-term issue that could resolve itself later this year. Similar to some analysts' predictions, we think AWS growth will bottom in the second quarter and accelerate into the second half of the year, partly due to easing year-over-year comparisons. Looking at the company more broadly, management recognizes that they're spending too much and that they must take additional action to cut costs to optimize the business and enhance profitability. We are intrigued to see what Amazon does in AI. Last month, AWS launched Bedrock, which allows developers to build and scale AI applications through its cloud. MSFT YTD mountain Microsoft's stock performance year to date. Microsoft's Azure business delivered 27% year-over-year growth in the company's fiscal third quarter . Again, slower then the 31% in fiscal Q2 and 35% in fiscal Q1. The company is now using AI as a tool to accelerate cloud growth and gain share. By incorporating ChatGPT's latest LLMs into Azure, Microsoft hopes to attract new customers. ChatGPT was introduced by Microsoft-backed OpenAI late last year. Since then, its wild popularity has put AI front and center the minds of investors. On Thursday's fiscal Q3 earnings call, Microsoft said it continues to see "the world's largest enterprises migrate key workloads to our cloud." The Club's take: Microsoft demonstrated impressive cloud growth given the difficult macroeconomic backdrop for the quarter. We were also encouraged to hear Microsoft's claims that Azure took market share in the quarter as customers moved toward its AI-powered applications and infrastructure. GOOGL YTD mountain Alphabet's stock performance year to date. Google parent Alphabet reached cloud profitability for the first time during the first quarter even as momentum slowed. Cloud revenues were up 28% year over year, delivering an operating profit of $191 million. Growth for the quarter, however, was lower than the fourth quarter's 32% year-over-year and the third quarer's nearly 38% advance. Google said on last Tuesday's post-earnings call: "A number of organizations are using our generative AI large language models across Google Cloud platform, Google Workspace and our cybersecurity offerings." Alphabet said it's the first cloud provider to integrate Nvidia's (NVDA) L4 Tensor Core GPU (graphics procesing unit) for large AI workloads that was unveiled last month. Nvidia is also a Club name. The Club's take : We're encouraged by the solid cloud performance and its first-ever quarterly profit. We hope to see a reacceleration in cloud growth along with profitability momentum. At the same time, we remain cautious on the stock for other reasons. Microsoft's AI-powered Bing is eager to take any market share it can get from Google's near-monopoly in search. The slower economic backdrop and the Justice Department's antitrust lawsuit targeting Google's dominance in online advertising are also points of uncertainty. (Jim Cramer's Charitable Trust is long AMZN, MSFT, GOOGL, NVDA. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Dado Ruvic | Reuters