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The cloud no longer is lifting Amazon.com Inc.’s business into the sky, at least not from investors’ point of view.

The retail, media and cloud giant today said revenue at its Amazon Web Services Inc. cloud computing unit continued to slow but still rose 35%, to $9 billion, in its third quarter, maintaining its big lead in the key market.

But Amazon’s shares fell more than 6% in after-hours trading after the company issued a disappointing fourth-quarter forecast for its overall business, predicting net sales of $80 billion to $86.5 billion, translating to growth of 11% to 20% from last year’s fourth quarter. Analysts were expecting revenue of $87.37 billion. Update: After sleeping on it, investors were a little more sanguine, sending shares down only about 1.5% in Friday trading.

Amazon also forecast operating income will fall to $1.2 billion to $2.9 billion from $3.8 billion a year ago, as the company cited higher investments in free Prime one-day shipping and in products and salespeople for AWS.

Amazon overall reported net income of $2.1 billion or $4.23 a share, down 26% from a year ago, on revenue of $70 billion. Analysts had expected a profit of $4.62 a share on $68.81 billion in revenue, so the company beat on revenue and missed on profit.

The biggest concern of investors is how much Amazon will spend to accelerate a planned expansion of one-day shipping. During the second quarter, it said it would spend $800 million and added that more investment in the initiative is likely. Its spending on shipping worldwide jumped 46% from a year ago, to a record $9.6 billion.

Chief Executive Jeff Bezos said customers have already ordered “billions” of items with free one-day shipping. “It’s a big investment, and it’s the right long-term decision for customers,” he said in brief prepared remarks, adding that 

Amazon also said it hiked headcount by 22% in the quarter, to 750,000 people.

Shares rose 1% in the regular session today, to $1,780.78. Amazon’s shares have risen about 17% on the year, a little under the S&P 500 index’s 20% rise.

In the clouds

For its part, Amazon Web Services’ 35% growth still means it’s driving much of the overall company’s growth. But it’s another ratchet down from the 37% growth rate in the second quarter, the third quarter in a row of declining revenue growth.

It’s another sign that the cloud computing market is cooling slightly, becoming a bit more mature after many years of hypergrowth. Rival Microsoft Corp. said Wednesday that its Azure infrastructure-as-a-service revenue slowed again in its fiscal first quarter, to 59% from 64% in its fourth quarter.

“It was clear that the hypergrowth the cloud vendors were showing for the last years was not sustainable forever, and now the cracks are beginning to show,” said Holger Mueller, an analyst with Constellation Research Inc. “It now comes back to the AWS unit to try to keep that growth level over the 30% mark, to remain the growth and profit engine of Amazon overall.”

AWS’ business remains a relatively small portion of Amazon revenue, at 13%. But besides its still-healthy revenue growth, it has an outsized impact on Amazon’s profitability, accounting for almost 72% of the entire company’s operating profit.

Patrick Moorhead, president and principal analyst at Moor Insights & Strategy, told SiliconANGLE that it’s important to recognize that it was still an “exceptional” quarter for AWS.

“AWS sales grew $2.3 billion for the quarter, which is larger than the overall annual size of most cloud companies’ revenue,” he noted. “To put this into perspective, if we annualize AWS’s Q3 numbers, it would be a $36 billion business compared to Google Cloud at $8 billion. Google’s Cloud business includes a lot of G Suite software as a service, not IaaS or platform as a service.”

Still, AWS’ prospects are clouded somewhat by repeated delays in the U.S. Department of Defense’s 10-year, $10 billion JEDI cloud computing award, for which AWS is the lead contender versus Microsoft Corp. Earlier this week, DOD Secretary Mark Esper recused himself from reviewing the contract because his son works for IBM Corp., which has been out of the running for some time.

Amazon said on an analyst conference call that it’s continuing to invest a lot in AWS, in particular hiring more people in sales and marketing. “We continue to feel good not only about the topline but the bottom line as well,” said Chief Financial Officer Brian Olsavsky.

Given the growth and size of cloud computing at this point, AWS, Microsoft and others have an outsized influence on much of the enterprise technology industry, in particular their level of spending on computers, storage and networking gear. According to Morgan Stanley research, capital spending by the so-called “hyperscaler” cloud and consumer services providers points to an acceleration into year-end and next year, peaking at 25% growth in the first quarter of 2020.

AWS is constantly introducing new cloud services and features at the rate of hundreds a year, but it’s expected to debut a flurry of them at its annual re:Invent conference in early December. In particular, it’s likely to provide timing for when it will start shipping its Outposts system for bringing its cloud technologies to on-premises data centers that it announced at last year’s re:Invent. Such “hybrid cloud” arrangements appeal greatly to large enterprises that have existing data centers they can’t or don’t want to close abruptly but still want the cost and speed benefits of cloud computing.

“A lot is riding on the announcements at re:Invent, with the most riding on AWS Outposts,” Mueller said. “It’s a market AWS so far has not tapped into at all.”

Dave Vellante, co-CEO of SiliconANGLE Media Inc. and chief analyst of SiliconANGLE sister market research firm Wikibon, provided a deeper analysis of Amazon’s and AWS’ results in this Breaking Analysis video:

Photo: Robert Hof/SiliconANGLE