Meta Platforms (META) and Amazon (AMZN) are both tech giants with fundamental similarities, but META has outperformed AMZN year-to-date by a significant margin, leading some investors to question the reason behind this disparity.
Both companies have laid off thousands of employees in the past six months and are cash-rich, providing a good cushion during a time of bank failures. Additionally, both stocks are trading at discounts to their historical multiples from a price-to-earnings and EV/EBITDA perspective.
However, according to Jefferies analyst Brent Thill, the slowdown and uncertainty in Amazon’s cloud services business, known as Amazon Web Services (AWS), may be the reason why META is outperforming AMZN. Unlike Amazon, Meta does not operate a cloud business.
Slowing cloud demand remains a significant concern, as businesses shift their focus from accelerating cloud migration to optimizing cloud costs. Thill’s analysis shows that 2023 sales estimates for AWS continue to decline, with projections currently 12% lower than they were in February 2022 and 5% lower than the beginning of the year. Operating margin estimates for AWS are falling even faster.
Thill’s analysis also shows that AWS’s year-over-year net sales growth has decelerated for four consecutive quarters, and its backlog growth has decelerated for three consecutive quarters. AWS’s operating margin has been under pressure since peaking at 35% in the first quarter of 2022, with the fourth quarter 2022 operating margin of 24.4% representing the lowest level since the second quarter of 2017.
Investors are concerned about the durability of AWS growth as customers shift to cost optimization and delay broader transformations during a period of increased budget scrutiny. Thill believes that AWS’s growth rate will bottom in the second quarter of 2023, and operating margins will not improve until 2024.
In conclusion, although Meta and Amazon have similarities, the difference in their cloud businesses may be the reason why Meta is outperforming Amazon. Investors are cautious about Amazon’s AWS growth prospects due to its decelerating sales growth and declining operating margins. As a result, they may be investing in Meta, which does not face similar concerns.
