- Amazon cloud revenues should grow 50% this year, and that's just a start.
- Amazon's infrastructure niche is the fastest-growing part of the business.
- Buy Amazon stock for its leadership in the cloud.
In 10 years, Amazon's (NASDAQ:AMZN) Web Services has grown from being an interesting idea into the dominant business trend of the decade.
It began selling what it called S3 services in March 2006 and will have 17 data centers or "regions" by the end of this year, generating $12 billion in business with operating margins near 25%.
If that were the end of it, it would be great. But this market is just starting to take off. Which means Amazon's cloud ceiling is limitless.
In mathematical terms, Amazon Web Services is a “variable,” the rest of Amazon “fixed.” We know how the store should do, we know how the “fulfilled by Amazon” part of the business should do. We even have a good handle on Amazon Prime.
What we don’t really know – what many investors don’t believe – is the degree to which Amazon Web Services has transformed technology, media and commerce. RBC Capital Markets calls AWS “the most powerful trend in all of technology, media and telecommunications today.”
Technology giants like HP INC (NYSE:HPQ) and IBM (NYSE:IBM) have been knocked off their perches because AWS builds its own servers. Media giants like Viacom -B (NASDAQ:VIAB) and CBS (NYSE:CBS) have been bypassed by Amazon’s services for clients like Netflix (NASDAQ:NFLX). Merchants from Walmart (NYSE:WMT) to Gap (NYSE:GPS) have been knocked off-stride by Amazon’s increasing dominance in their markets.
Amazon stock, after running from $300/share to nearly $700/share in about 18 months, fell below $500 earlier in the year but is now in a trading range of $550-575. There is an upward bias indicating a good time for small investors to buy into the stock.
This kind of churn is inevitable. But not many companies, such as Facebook (NASDAQ:FB), have the capital structure, or the nerve, necessary to make it happen.
Thus, analysts like Morgan Stanley (NYSE:MS) are still displaying “hockey stick graphs” for AWS, believing the cloud infrastructure business it dominates will be worth $38 billion this year, then grow another 300% to $106 billion by 2019, with Amazon getting nearly half of it. The Platform and Software parts of the business won’t exceed the Infrastructure growth rates until the next decade, Morgan Stanley says. Infrastructure and platforms are at the heart of the Amazon market.
You can argue that Amazon’s $275 billion market cap is “stretched” because it values the company at more than 2.5 times its annual sales from last year. That’s extremely high for a retailer. But Amazon is not a retailer. Amazon is an infrastructure company. The key to that infrastructure is AWS. That $12 billion in expected 2016 revenue should be valued at 12 times sales, meaning everything else is going to be worth about the same as revenue.
Amazon stock is becoming like Apple, a stock you own rather than trade, one that will grow into its current valuation and more over time.