We are almost a quarter of the way through 2016 and Amazon.com, Inc. (NASDAQ:AMZN) stock is still in the doldrums. Year-to-date, Amazon stock plunged a disappointing 19.1%. But that’s not the whole story because in 2015, the stock was the #2 gainer among all S&P 500 companies. Moreover, despite the recent downturn, the outlook for AMZN stock is still bright.
Allow me to explain…
This Could Be Huge for Amazon Stock
You see, momentum in a stock can only last so long. So it shouldn’t really come as a surprise that after climbing 117.8%, Amazon stock is having a pullback. But for a stock to drop nearly a fifth of its value, there must be a reason. And from what I can see, the reason might not be as convincing as it looks.
First up is the overall market condition for tech stocks, particularly Internet stocks. As the U.S. stock market entered 2016, quite a few big names in the Internet sector are experiencing double-digit declines.
Most recently, Amazon stock is suffering from a reported loss of business from a major client—Apple Inc. (NASDAQ:AAPL). Last week, CRN reported that Apple could be a customer of Alphabet Inc’s (NASDAQ:GOOG) “Google Cloud Platform.” (Source: “Cloud Makes for Strange Bedfellows: Apple Signs on with Google, Cuts Spending with AWS,” CRN, March 16, 2016.)
In the past, Apple had always used “Amazon Web Services”(AWS) as the cloud infrastructure to run its “iCloud” and other services. Now, AWS could be losing a considerable portion of Apple’s business. Sources said that Apple is spending between $400 million and $600 million on Google Cloud Platform.
However, if you take a closer look, you’ll see that the situation is not that bad. First, keep in mind that the report has not been confirmed. And even if it’s true, it could be that Apple is simply adding a new service provider. There is no indication that Apple is cutting spending at AWS.
Now, even in the worst-case scenario, things might be better than expected. Morgan Stanley (NYSE:MS) estimated that Apple spends approximately $1.0 billion each year on AWS. Judging by the numbers in the CRN report, even if Apple is choosing Google over Amazon, the company is not ditching Amazon entirely.
Also, don’t forget that AWS brought in $7.9 billion of revenue for Amazon in 2015. Moreover, the fast-growing segment is already profitable. Losing part of Apple’s business is not a good thing, but it’s certainly not the end of the world for AWS. (Source: “Amazon.com Announces Fourth Quarter Sales up 22% to $35.7 Billion,” Amazon.com, Inc, January 28, 2016.)
In addition, while Apple might be going elsewhere, another tech giant is going full-throttle with Amazon’s cloud service. I’m talking about Netflix, Inc. (NASDAQ:NFLX), the leading on-demand video streaming company.
Last month, Netflix announced that it has closed its last data center and completed the migration to AWS—a shift that took more than seven years. The video streaming giant started the move back in August 2008, when its own database corruption resulted in the company unable to ship DVDs to its customers for three days. (Source: “Completing the Netflix Cloud Migration,” Netflix, Inc., February 11, 2016.)
Netflix said that they chose Amazon’s AWS as its cloud provider because “it provided us with the greatest scale and the broadest set of services and features.” (Source: Ibid.)
Note that “Amazon Prime Video” is a major competitor to Netflix’s video streaming service. But still, Netflix chose AWS as its cloud provider. This shows just how appealing Amazon’s cloud service really is.
The Bottom Line on Amazon Stock
And there’s more. Amazon has moved into the “Internet of Things” (IoT) space with AWS IoT. Rather than just focusing on IoT devices, AWS IoT will be a platform capable of supporting billions of devices and trillions of messages.
As one of the fastest-growing segments of the company, AWS could continue its role as a catalyst for Amazon stock.