Amazon.com, Inc.: This Could Be The Biggest Reason To Buy AMZN Stock

  • Amazon made a series of service announcements at its recent AWS re:Invent 2016 conference.
  • AWS and Salesforce extended their global strategic alliance delivering five new service integrations.
  • The market leader in the Cloud space has no plans to slow down or rest on its laurels.
AMZN Stock Is This The Biggest Reason To Buy Amazon.com, Inc. (AMZN) Stock Today_2
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Amazon.com Inc. (NASDAQ:AMZN) stock fell by more than 5 % over the last week. There were a series of  service announcements last week by Amazon’s cloud-computing business, AWS, but they also didn't do much to support the falling AMZN stock. However, AWS re:Invent 2016 has reaffirmed that AWS is one strong reason to buy AMZN stock now. AWS is expected to top $12 billion in revenue this year, compared with $7.9 billion last year. The public cloud pioneer has gone from being the largest, most dominant public cloud service for web developers and startups to providing the most important technology to businesses: the enterprise cloud. Amazon has sustained its aggressive cloud approach, even though competitors like Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL) are trying to catch up, using their deep pockets. Here's why AWS is not slowing down anytime soon and will continue to drive AMZN stock to greater heights.

On Course To Become A Complete Cloud Company

After dominating the public cloud,the Vmware (NYSE:VMW) partnership and the expanded alliance with Salesforce (NYSE:CRM) has put AWS on course to capture enterprise cloud market as well. Large enterprise customers are shifting their buying behavior and the world is moving fast to “buy as you go” infrastructure and software models. AWS partnership with VMware ensures it has a proper hybrid cloud strategy to offer the enterprises the best of both public and private cloud.

Once the cloud of choice for cash-poor startups, AWS is wooing big businesses and software makers big time. Capital One, Hertz, AOL, John Deere, Workday and Netflix  are some of the new big enterprise clients for AWS. The regulatory body, Financial Industry Regulatory Authority (FINRA) and the White House are also now AWS users primarily due to its high security. This goes to show Amazon cloud computing’s high product standards and reinforces the fact the AWS competes in the market not based on its price but its quality.

The Fortune 5,000 companies make up 80% of global IT spending, out of which many still have in premise IT infrastructure. Given, all enterprises have not moved to cloud based IT infrastructure, there is an enormous market to be captured which will keep AWS hungry for more and more revenues. The battle is on as AWS, Microsoft, IBM, Google fight to win big business accounts (and the software vendors selling into those accounts) for their respective clouds. IT infrastructure has a market potential of $300 billion and AWS is on course to capture the bulk of it with its complete cloud offerings.

Also Read: Amazon Stock: Why Amazon.com, Inc. (AMZN) Stock Is A Good Buy Now

Why AWS Is Winning

The success of AWS has been due to its double-down strategy, by constantly lowering prices and at the same time increasing the numbers of cloud services available for customers, all while producing outstanding financial performance. AWS isn’t just dominating because it was first (although that’s part of it), it’s also continuing to innovate at an astonishing rate, adding around 1000 new features every single year up from 722 just last year, according to a chart posted by CEO Andy Jassy during his re:Invent keynote.

The old guard of the enterprise data center — Cisco, Dell EMC, IBM, HP Enterprise, Oracle and VMware – have collectively seen meaningful declines in their businesses. In 2012, the year of the first re:Invent conference, these companies generated $221 billion in revenue. In 2016, in re:Invent’s fifth year, these same companies will record $206 billion in revenue. That equates to a stunning $15B reduction in revenues with the group shrinking, on average, by 3% every year.

AWS Could Be The Biggest Business Of Amazon In Future

By itself, Amazon Web Services is worth $160 billion, or 44% of Amazon's enterprise value, according to Macquarie, which values the cloud unit at 9 times projected 2017 revenues. The gravity of the AWS ecosystem is just pulling everything in. Not only does it offer products and services, but it provides customers and the competition to create their own offerings. With the launch of SaaS subscription products in Marketplace, Amazon is moving toward some of the most valuable cloud purchases -- recurring subscription revenue.

One area where Dan Sholnick, a partner at Trinity Ventures, sees AWS running behind is artificial intelligence, which is part of a huge transformation in how developers will be building software moving forward. To catch up with Google and Microsoft which have a head start in this area, it launched its new Amazon AI platform. Rekognition, Amazon Polly, Amazon Lex are some important tools launched.

Also Read: AMZN Stock: Why Amazon.com, Inc. Is Primed For Growth This Holiday Season

Amazon and Intel are also partnering to develop a reference design for developers interested in manufacturing Alexa-enabled speakers. They are taking the infrastructure and development underlying [the Amazon Echo] to a whole new level to take on the likes of Google, Microsoft and Apple (NASDAQ:AAPL) who are already established in this space. New integrations in the Salesforce alliance are also on these lines, the Alexa Toolkit for Salesforce and Salesforce's Internet of Things Cloud with AWS’s IoT service.

AWS CEO Andy Jassy mentioned the "capability to build further up stack" as another potential avenue to grow AWS and take on a market "that's trillions of dollars worldwide". Moving up the stack means offering more sophisticated applications, that's what it showcased at re:Invent 2016.

Investor Takeaway

AWS accounted for more than two-thirds of the company’s operating profits over the past four quarters despite representing less than 9% of revenue for that period. Wall Street expects Amazon’s operating income to nearly double this year to $4.1 billion and surge another 79% to $7.4 billion next year with the cloud business driving the bulk of those gains. AWS has thriving businesses across the enterprise software spectrum (growing 55% YOY ). According to Baird, AWS will represent just 5% of data center spend this year and less than 1% of overall enterprise IT spend. In other words, there is still significant room for growth as more enterprises embrace cloud technologies. AWS’s scale advantages coupled with an impressive track record of innovation and huge aspirations have the company extremely well positioned for the next decade. It should continue to drive Amazon's profit growth for some time.

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Comments on this article and AMZN stock

stocksman
bullish
What are expected revenues and profits from AWS division for 2016 for AMZN?
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sreekanth.anasa
bullish
AWS has $13 billion revenue run rate as of Q3 2016 and it contributed almost 50% of Amazon's profits in Q2 2016. http://www.forbes.com/sites/greatspecula...
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