Amazon.com, Inc. (AMZN) AWS Is a Goldmine


Many big companies have been making strong efforts to turn to the cloud to realize maximum revenue generation, but most have been very secretive of their cloud revenues until now. Similar was the case in respect of Amazon.com, Inc. (NASDAQ:AMZN). The company noted that it has been ten years since its Amazon Web Services (AWS) has been in operation. Until the fourth quarter results of 2014, the online retailer refrained from disclosing the numbers of AWS. A glimpse into the numbers of Amazon’s AWS shows us that the business may be even more valuable than expected.

Until now, Amazon.com, Inc. (NASDAQ:AMZN) has been investing in cloud computing but the company never provided information on the returns or realizations to investors. The assumption had been made that like other Amazon businesses, margins were thin and pressures were intense from competition.  Amazon exceeded investors expectations with the realization that the division was generating an operating profit, leading many to believe the fast growing part of Amazon’s business, is worth even more then expected.

Big Companies

Many big companies have announced strong growth in cloud computing. However, they have not come out with data. For instance, Microsoft Corporation (NASDAQ:MSFT) said recently that it recorded more than 100% growth in its cloud segment in the March quarter. It merely said that on an annualized run rate, revenue was $6.3 billion. Similarly, International Business Machines Corp. (NYSE:IBM) delivered 60% revenue growth in the cloud but did not provide the revenue number.

Now that Amazon.com, Inc. (NASDAQ:AMZN) announced the key data about its AWS, there are a spate of reports projecting or estimating different numbers. However, the most important is the valuation of the division. AWS appears to be valued around $50 billion currently, or $110 a share alone. The potential in the cloud computing division will drive the stock to gain in the long-term.

Financial Numbers Of AWS

The online retailer reported 49% year-over-year growth in its revenue, to $1.57 billion in the first quarter, from $1.05 billion in the previous year quarter. The company has not disclosed the figures of the second, third, and fourth quarters of the year 2014. Its trailing twelve-month net sales were $5.2 billion. Its AWS is said to be contributing about 5% to the total revenue.

However, the company disclosed operating income for the March quarter. It recorded an 8% year-over-year uptick, to $265 million, from $245 million in the year-ago quarter. The Street was surprised more by the operating income than the growth in revenue in the first quarter. Until now, analysts and investors have had no clue about the operating income. The division had an operating margin of nearly 17 percent, despite intense competition from competitors

Market share

Amazon.com, Inc. (NASDAQ:AMZN)’s AWS recorded a market share of 30% in the fourth quarter and delivered 51% year-over-year revenue growth. On the other hand, Microsoft Corporation (NASDAQ:MSFT) enjoyed a market share of a little over 10%, though its cloud segment achieved a 96% uptick in the December quarter. While International Business Machines Corp. (NYSE:IBM) enjoyed a market share of over 5%, Google Inc (NASDAQ:GOOGL) settled with a market share of over 5% in the December quarter as well.

On top of this, Amazon.com, Inc. (NASDAQ:AMZN)’s AWS share reached a five-year high in the cloud infrastructure service market. Last year, cloud delivered a growth of 48%. Synergy Research Group said that both Amazon and Microsoft were able to build up the momentum, which was impressive.

Cloud Market Value

Cloud computing provides unlimited opportunities currently, since most of the software service providers were hesitant to push it for fear of losing big revenues. This was because of client-centric or industry-based software developed by them. Also, there was fear about the security of the valuable data of the companies. Despite some negative sentiments, cloud computing continues to grow at a much faster rate than the industry would have imagined. The bigger companies can not stop the growth of cloud computing.

For instance, a few years back, a market study on the United States Federal cloud computing market predicted that it would reach $47 billion in 2013 – 18. This meant a CAGR of 16.2% during the period. Globally, the cloud computing market could reach $270 billion by the turn of 2020, at a CAGR of 30%. Each and every industry is now trying to go to the cloud. Sensing the growth, Microsoft Corporation (NASDAQ:MSFT)’s CEO, Satya Nadella, unveiled a fresh slogan, ‘mobile first, cloud first’ after he assumed the position. It has been providing much-needed growth for them.

Conclusion

Amazon.com, Inc. (NASDAQ:AMZN)’s AWS has already established a leadership position, with 30% market share. The company has still more opportunities to grow in the cloud segment. The disclosure would allow different analysts to lift the price target on Amazon.com, Inc. (NASDAQ:AMZN)’s share. The growth opportunities for AWS will make the valuation of the online retailer even richer. Therefore, in whatever way one might think, AWS could be regarded as a gold mine that is beginning to unlock value.


Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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