Is Amazon's Cloud Business Actually Thriving? Some Data Tells a Different Story.

The rhetoric regarding Amazon (NASDAQ: AMZN) since the company posted its third-quarter results a little over a week ago has been overwhelmingly bullish. Shares surged immediately following the release of those numbers, and have held their ground in the meantime. Most of the credit goes to artificial intelligence (AI)-driven demand for its cloud computing services.

However, Amazon Web Services (AWS) isn't quite firing on all the cylinders that the market seems to think it is. Here's a closer look at a couple of red flags.

Image source: Getty Images.

Not all is as the superficial talk suggests

Don't misread the message. Amazon's cloud arm is doing OK. Revenue grew 20% year over year last quarter, pushing operating income up from $17 billion a year ago to nearly $21.6 billion this time around. Both extended long-established trends.

AWS' dominance of its market isn't quite what it used to be, though. A couple of data points raise red flags.

The first of these red flags is market share. AWS has less and less of it. Synergy Research Group reports that as of Q3, Amazon's share of the global cloud market (as measured by revenue) has slipped back to a multiyear low of 29%, extending another worrisome trend that's been in place since the middle of 2022.

Data source: Synergy Research Group. Chart by author.

As the graphic shows, Amazon's cloud business isn't losing most of this ground to the industry's powerhouses like Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) Google and Microsoft (NASDAQ: MSFT). Microsoft is losing market share as well! Rather, most of Amazon's prospective cloud computing business is now being won by smaller "other" providers that are able to offer more customized technological solutions.

In and of itself, it's not disastrous -- concerning, yes, but not disastrous.

Another detail of the matter raises even more concern, however. After widening quite a bit last year when artificial intelligence-driven demand for cloud computing service was downright frenzied, AWS' operating profit margins have tumbled in the past couple of quarters to 34.6% during Q3.

Data source: Amazon.com Inc. Chart by author.

This isn't necessarily disastrous, either. But it does raise the question of pricing power. Is Amazon being forced to make price concessions to win the cloud business it's still actually winning? Maybe. It certainly looks like it, anyway, leaving one to wonder about the terms of the company's recent deal with OpenAI.

This is no small matter. If the evolution of AI data centers is now entering a price war stage, Amazon's going to be forced into an ugly, margin-crimping fight that its shareholders aren't accustomed to seeing. Microsoft's cloud arm's operating margins grew sequentially -- again -- last quarter, from 40.4% to 43.3%, and it's got a dramatically sinking share of the business to show for it. (Google's cloud business isn't big enough or established enough to make for a meaningful comparison.)

It's a problem simply because much of Amazon stock's premium valuation may be rooted in the assumption that AWS would maintain the commanding control of the cloud computing market that it was enjoying a few quarters ago. It isn't.

Time to take a pause

Clearly, the market doesn't see it. Or maybe most investors do see it and just don't care. After all, as was noted, despite ample opportunity and reason to drag them lower, Amazon shares are still holding on to most of their post-earnings surge.

Whatever the case, this post-earnings bullishness arguably only adds to the growing risk that all artificial intelligence-related stocks are in a bubble on the verge of being popped. If that happens, Amazon's weakening hold on the AI's industry's growth could come to the forefront in a hurry, undermining the stock as a result.

More to the point for interested investors, this arguably isn't the time to be taking on any new positions in Amazon. In fact, unless you're truly committed to a long-term holding in the e-commerce giant, there's a case to be made for getting out at a nice profit while you still can, and then waiting to see where the proverbial chips fall.

James Brumley has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, Amazon, and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.