By Senad Karaahmetovic
Amazon (NASDAQ:AMZN) shares are roughly 2% in pre-market Tuesday after UBS analysts issued a warning that Street expectations for cloud growth remain too high for the first quarter.
Amazon, Microsoft (NASDAQ:MSFT), and Alphabet (NASDAQ:GOOGL) are expected to report on their Q1 performance later this month.
"Our checks down-ticked relative to our last round 3 months ago and in our view, Street growth estimates for 2023 are still too high," the analysts said in a client note.
For Amazon particularly, the Street estimates remain way too high. The Street expects AWS growth of 15% in Q1, down from the 20% reported for the fourth quarter. UBS analysts project that AWS likely grew 13% in Q1.
"This implies the growth rate of industry leader AWS will have gone from 40% in 4Q21 to 13% in 1Q23 in just 5 quarters. We find this a surprising turn of events that far exceeds the pressure we're witnessing across most other technology sub-sectors. In our view, this is clear evidence of a significant pandemic-fueled cloud demand boost and resulting wasteful spend that is now being eliminated by enterprises and their consulting partners."
Moreover, the analysts warn that "most investors believe that these estimates are too high and that AWS revs growth could hit 8-10% in 2Q23." For Q2, UBS sees AWS growing at 10%.
"The current sell-side analyst consensus estimate is for AWS revenue growth to level out at ~14% in 4Q23 from 15% in 1Q23, presumably on the basis of easier comparisons and/or a 2H23 demand improvement. In our view, most (at least tech/software) investors have little/no confidence in these estimates and are modeling AWS revs growth to dip to 8-10% in 2Q23 and to be ~10% in 4Q23," the analysts added.
Overall, they conclude by saying that the cloud growth is "much worse" than expected and "is unchartered territory for most investors."