- Amazon reports third quarter results this week
- Its cloud revenues need to be up 80% over last year to maintain momentum
- More than two-thirds of the company remains devoted to retailing
The most important number of the week comes out on Thursday, buried deep in an earnings release.
The number is the third quarter revenue of Amazon Web Services, Amazon's (NASDAQ:AMZN) cloud stack. The figure for the second quarter was $1.8 billion, 80% higher than the previous year’s $1 billion. The new Amazon cloud number also needs to be 80% higher than a year ago for Amazon stock to maintain its momentum.
That momentum is considerable. Since it last reported numbers Amazon is up 18%. For the year it is up 84%.
This despite the fact its overall growth is slowing, and came in at roughly 15% year-over-year. This despite the fact that profits are meager, with just $92 million in net income in Q2 2015.
Amazon is said to “dominate” revenues from public cloud to such an extent that some market losers are starting to use the “m” word – monopoly – to describe it. The company’s home town paper, The Seattle Times, quotes a Gartner Group analyst saying that Amazon now has 10 times the capacity of its next 14 rivals combined.
Amazon’s cloud, unlike the rest of the company, is also wildly profitable, with $391 million of last quarter’s $1.8 billion in revenue falling to the bottom line. Its cloud dominance has made it a leader in hosting databases, according to Gartner, despite a lack of documentation and below-average performance.
Amazon’s cloud has thoroughly disrupted the enterprise technology sector, blowing away companies like HP (NYSE:HPQ), which backed away from public cloud early this year after loudly proclaiming its ambitions, as well as Alphabet Inc-A (NASDAQ:GOOGL), IBM (NYSE:IBM), and phone companies like AT&T (NYSE:T) that have been advertising their own clouds heavily. But it has also drawn international competition this year, with Alibaba (NYSE:BABA) and Huawei both launching billion-dollar cloud initiatives.
Long-time analyst Matt Asay, currently an executive with Adobe Systems (NASDAQ:ADBE), has gone so far as to call the merger of private cloud leader Vmware (NYSE:VMW) with privately held Dell as akin to the notorious HP-Compaq merger of the last decade, doomed before the ink is dry, due to Amazon’s dominance of the public cloud market.
The sky-high expectations for its cloud have taken Amazon’s stock value way beyond the usual metrics. At its present market cap of $266 billion, the company is worth more than three times its annual revenues – most successful retailers are worth about half their revenues and the world’s biggest retailer, Walmart (NYSE:WMT), is worth less than 40% of its annual revenues. And it’s important to note that Amazon remains, at its core, a retailing company. More than two-thirds of its revenue comes from selling things to people, not from Amazon Prime movies, and not from Amazon Web Services.
Thus any number showing less than 80% growth in AWS, no matter how it’s spun, and no matter what happens to the rest of the business, could send Amazon stock into a downward spiral Friday. Many investors hope that’s so – it would give them a chance to get in.