Amazon: The AWS Business Faces Challenges But The Stock Looks Appealing

Amazon Web Services (AWS) reported June 2025 TTM revenue of $116.4 billion, growing 18%, notably slower than competitors Azure (34%) and Google Cloud (31%), signaling concerns over market share erosion. While CEO Andy Jassy emphasized AWS's scale, security, and investment in custom silicon like Trainium for GenAI, the division's 2Q25 operating margin declined to 32.9% from 39.5% in 1Q25, partly due to seasonal compensation and higher depreciation. Despite these growth and margin pressures, particularly around AI strategy and capital expenditure, the article concludes that Amazon's stock remains attractive for long-term investors, with its current market capitalization near the bottom of the author's valuation range.

Analysis

Amazon Web Services (AWS) is confronting significant competitive challenges, as its 18% year-over-year TTM revenue growth to $116.4 billion trails considerably behind Microsoft Azure's 34% and Google Cloud's 31%. A critical concern is that Azure's incremental TTM revenue of $19 billion has surpassed that of AWS ($17.8 billion), signaling potential market share erosion despite AWS's larger revenue base. In response to analyst questioning on the 2Q25 earnings call, CEO Andy Jassy defended AWS's position by citing its scale, superior security, and a long-term strategy centered on its proprietary Trainium2 silicon, which he projects will offer 30-40% better price-performance for AI inference workloads. However, this strategy is capital-intensive and carries execution risk against a highly innovative competitor in Nvidia. Financially, this investment contributed to a sharp decline in the AWS operating margin from a record 39.5% in 1Q25 to 32.9% in 2Q25, a drop attributed to higher depreciation, seasonal stock-based compensation, and FX headwinds. Despite these pressures, AWS's backlog grew a robust 25% YoY to $195 billion, and its margins remain superior to those of Google Cloud at comparable revenue levels. The author's sum-of-the-parts valuation model places Amazon's value between $2.35 trillion and $2.775 trillion, suggesting the current market capitalization of $2.371 trillion is positioned at the low end of the estimated range.

Key Decisions for Investors

• Given the stock's valuation is near the bottom of the author's calculated range, long-term investors may consider the current price an attractive entry point, contingent on the successful execution of the AWS growth strategy.
• Investors should closely monitor AWS revenue growth rates in subsequent quarters to verify if the gap with Azure and Google Cloud narrows, as continued underperformance could invalidate the long-term bullish thesis.
• The success of Amazon's custom silicon strategy with Trainium is a critical long-term driver; watch for adoption metrics and evidence that its price-performance advantages are materializing against formidable competition from Nvidia.
• Pay close attention to AWS operating margins to discern whether the recent decline is due to temporary factors like seasonal compensation and planned investment, or if it signals a more structural deterioration in profitability due to competitive pressure.