Bad News for OpenStack; Good News for AMZN Stock
Once again, Amazon.com, Inc. (NASDAQ:AMZN) has used overwhelming force to crowd out its rivals from the cloud computing business. As a result, shares of Amazon stock (AMZN stock) bounced up 0.85% on the news, starting a potentially bullish run on the stock.
Both Hewlett Packard Enterprise Co (NYSE:HPE) and Cisco Systems, Inc. (NASDAQ:CSCO) are scaling back their efforts on the “OpenStack” network. OpenStack is a public cloud network that is built up through third-party involvement, so the loss of two major backers is a serious blow.
Moreover, OpenStack was supposed to loosen Amazon’s stranglehold on the cloud computing market. Amazon has run roughshod over its rivals for years, using low prices and superior efficiency as a distinguishing factor. It has been the 800-pound gorilla of the industry.
Many of the company’s business rivals believed that an open-sourced platform like OpenStack was the only way forward. Rackspace Hosting, Inc. (NYSE:RAX), Hewlett Packard, and Cisco were the biggest backers of OpenStack but with two of them admitting defeat, odds of Amazon’s victory have skyrocketed. (Source: “HPE and Cisco Moves Hurt OpenStack’s Public Cloud Story,” Fortune, December 19, 2016.)
But let’s back up for a second. What is a public cloud?
For those who aren’t familiar with the term, a public cloud is the sum of computer servers and data centers connected across the world. A company can set up these servers and data centers themselves, then lease out storage space and computing power to other businesses.
This is called cloud computing. Amazon’s data-heavy e-commerce arm already necessitated the building of several data centers, so the side-step into cloud computing was organic and efficient.
It is one of the fastest-growing branches of technology, not to mention that it is a huge moneymaker for Amazon. In fact, it is estimated that it will soon bring in $13.0 billion for AMZN stock.
During 2015 and 2016, Amazon was able to declare profits almost entirely because “Amazon Web Services”—the firm’s cloud computing arm—had dragged the entire company into the black.
Some analysts were worried that increased competition in the public cloud space could hurt AMZN stock. However, they failed to account for Amazon’s pricing strategy. It often employs razor-thin margins as a strategy to weed out competitors. It has worked, time and time again.
Now that two major rivals have turned tail in the cloud computing fight, we expect further gains for Amazon stock.