Cloud Computing Driving Growth for Amazon
Amazon.com, Inc. (NASDAQ:AMZN) stock reported first-quarter earnings and it was an absolute blowout. AMZN stock is up nearly 12% this morning, as the e-commerce giant destroyed analyst expectations.
Amazon’s first-quarter results are much more impressive than they were a year ago, when the company missed on revenue. This year, though, Amazon’s revenue came in at $29.10 billion, up 28% from last year, beating analysts’ expectations of $27.99 billion.
Earnings per share (EPS) were almost double the forecasts. Analysts were expecting $0.58 a share, but Amazon delivered $1.07 a share.
It’s safe to say that Amazon’s first quarter was impressive—especially for a company that tends to sacrifice earnings at the expense of investing in different areas of the business.
However, there was one number in the earnings report that really stuck out to me: cloud computing revenue.
When Amazon launched “Amazon Web Services” (AWS) 10 years ago, Amazon bears didn’t really know what to make of the service. They just didn’t see much value at the time in a service that lets businesses rent data storage and computing over the Internet.
Fast-forward 10 years, and those bears are eating their words, as AWS is becoming a major growth-driver for Amazon. In the first quarter, AWS revenue skyrocketed 64% from the same period a year ago to $2.56 billion, while operating income grew 170%.
AWS is now the most profitable segment at Amazon, accounting for 56% of Amazon’s total profit this quarter. (Source: “Amazon crushes earnings expectations on strength of Web Services,” Yahoo! Finance, April 29, 2016.) That’s astonishing considering that AWS is still a small, albeit growing, part of Amazon. It only accounts for 3.6% of operating revenue (up from 1.1% a year ago). (Source: “Cloud Services Show Their Value in Earnings Reports,” The New York Times, April 29, 2016.)
What makes cloud computing so profitable is that a company like Amazon only needs about half a dozen people to run a large data center. (Source: Ibid.) A large part of cloud computing is automated; it runs very efficiently.
Amazon dominates the cloud computing space, too, so profits aren’t about to shrink anytime soon. AWS has 36.9% of the market, while Microsoft Corporation (NASDAQ:MSFT) and Alphabet Inc (NASDAQ:GOOG) trail far behind with market shares of 8.7% and 2.5%, respectively. (Source: “Amazon and Microsoft to Face Off in Cloud Computing Space,” Market Realist, February 9, 2016.)
Since its launch 10 years ago, many companies have built their online businesses with AWS. Behemoths such as Apple Inc. (NASDAQ:AAPL), Netflix, Inc. (NASDAQ:NFLX), Adobe Systems Incorporated (NASDAQ:ADBE), and Pfizer Inc. (NYSE:PFE) are using the service too.
The Bottom Line on AMZN Stock
Amazon has many potential growth catalysts, but a lot of them won’t reach their potential for at least a few years (I’m looking at you, “Amazon Prime Video.”) But Amazon does have a star on its hands with AWS. It’s small, but it’s growing fast and it already accounts for a large portion of Amazon’s profits. Look for AWS to be a major growth-driver for AMZN stock over the new few years.