- Cloud computing division will be a key value driver for Amazon.com Inc. stock in the future.
- Amazon Web Services (AWS) is a dominant market leader in the cloud computing space.
- AWS CEO’s ability to lead AWS is a key success factor.
Amazon.com, Inc. (NSDQ:AMZN) introduced Amazon Web Services (AWS) in 2006 to target the IT infrastructure business in the form of web services now known as “cloud computing.” Over time, Amazon Web Services has been able to scale up its operations offering reliable and low-cost infrastructure platform in cloud computing to thousands of businesses across 190 countries around the world.
It was a disruptive technology and this business model has returned substantial revenues for the company over the last 3 years. Net sales for Amazon Web Services have grown in strides from $3 billion in 2013 to a run-rate of $11 billion in 2016. This has also been partly the reason for the rally in Amazon stock price over the last couple of years.
Also read: AWS Can Do Wonders For Amazon.com Inc. Stock
Table 1: Amazon Web Services Financial Performance (2013 to 1st half 2016)
|Amounts in $ MM||2013||2014||2015||1H 2016|
|Operating income (loss)||673||660||1,863||1,321|
Source: Amazon 2015 Annual Report & 2Q 2016 Quarterly Report
The main driver for the consistent growth has been its first-mover advantage. In a cutthroat competitive technology space, it pays to be able to capture the major clients due to high switching costs. Amazon Web Services has multinational firms as clients that utilize its infrastructure services to be able to perform key tasks. Recently, Salesforce selected AWS as its preferred public cloud infrastructure provider, which reiterates AWS' competencies and client trust levels.
The company sells infrastructure in various regions around the world to increase its visibility. Further, it also has constantly invested in product innovation to be able to offer products better than its competition.
AWS Is The Clear Leader in Cloud Computing
These initiatives have resulted in AWS being able to keep competitors from stealing its market share. Based on a Synergy Research report, AWS remains a dominant market leader in the cloud computing industry cornering an estimated 30% share, with Microsoft Azure as the nearest competitor with around 10% share followed by IBM with 8% and Google at 5%.
While Microsoft does not publish figures of Microsoft Azure, it obviously needs to ramp up its investment in its cloud computing business to be able to match AWS in the coming years. Accordingly, it would be difficult to convince clients away from AWS unless there has been a major screw-up on the company’s services.
Having said that, this entrenched market position bodes well for Amazon as a whole. The latest September 2016 Gartner Research estimates that worldwide public cloud services market is projected to grow to around $209 billion in 2016, an increase of 17% year-on-year. The strong demand of the public cloud business is derived from IT modernization, cost savings as well as continued innovation.
It is noted that the majority of Amazon’s share value is basically from the retail business, where it sources a big chunk of its top-line. However, AWS is part of its growth, despite contributing only less than 10% of revenues in 2015. If you look at the strong revenue growth momentum, it would not be surprising if AWS would contribute in excess of 20% of revenues over the next 5 years.
The Hidden Factor
One intangible that the market has overlooked is AWS top honcho Mr. Andy Jassy, who is the architect of the AWS business model. He understands the cloud computing industry well and is one of the reasons for the consistent profitability of the business over its 10-year operating life.
Mr. Jassy maintains a relatively low profile, which is precisely why the market has not given him the appropriate recognition he deserves. Prior to the establishment of Amazon Web Services, it was difficult to convince corporate clients to use their IT infrastructure services, a relatively new technology in 2006. Furthermore, clients have associated Amazon to online retailing rather than a technology service provider.
Nevertheless, Mr. Jassy transformed the company into a market leader in the cloud computing space over time. His recent elevation to CEO position in April of this year is a strong signal that Amazon’s management is keen on growing this business further over the coming years.