Hello cherubs, I'm officially in manic mode, in a rush to write a few columns before my escape to the cave. I've been turning over a crazy idea in my head, and the more I think about it, the less ridiculous it seems: The most important technology company in the world today is AWS.
If you don't already know, AWS stands for Amazon Web Services, a division of Amazon (NASDAQ:AMZN). Accounting-wise, it's hidden under "Other Income" in Amazon's income statement.
I'll discuss how to value AWS, then I'll reveal my suspicions about the Amazon phone, the development of which is integrally related to AWS. (By the way, Amazon was a top ten pick in 2013; Check the performance of my stock picks here.)
AWS will generate about $6 billion in revenue in 2014, about $10 billion in 2015, a tiny fraction of the revenue base of Microsoft (NASDAQ:MSFT), Google (NASDAQ:GOOG), and Apple (NASDAQ:AAPL). So what has enraptured my fancy? Enough to see it as the most important tech company in the world?
It's in the strategic positioning of the model, and what it portends for the future. AWS utterly and completely dominates the public cloud. And the bulk of computing is moving to the cloud. Even incumbents are admitting it now: the move from on-premise to off-premise, from localized to centralized computing is going to happen. More on how AWS is connected to Amazon's secret phone project, first a look at the value of AWS.
How much is AWS worth, anyway?
Sales are compounding at 60% and likely to accelerate, given growing demand at the enterprise level. The allure is from low variable expense (versus large capital expenditures), the elasticity of the cloud (users don't have to guess at capacity needs), as well as greater computing power - for programmers, it's like comparing driving a Ferrari to a horse and buggy. (Something I alluded to in a letter to Warren Buffett, in which I warned him about holding IBM stock in an AWS dominated world.)
A value north of $100 billion strikes me as a reasonable starting point, or ten times 2015 sales. Long-term, the value of AWS is likely to grow to be much, much greater, a multiple (two times or more) of Amazon's current market cap of $185 billion. Here are some considerations:
- Total addressable market is in the trillions of dollars
- IAAS (infrastructure-as-a-service) is a winner-take-all vertical; economies of scale* make an impenetrable moat.
- AWS has 5 times more server capacity than the next 14 competitors combined. Funny thing is, with AWS increasing it's lead, Gartner had to rescale its "Magic Quadrant." Competitors weren't showing up under the old scale.
- Rapid iteration of new services at AWS is accelerating (this dynamic is similar to the magic of compounding). Google, with all of their resources, is hard-pressed to catch up, and for cause: To achieve scale requires technical expertise that comes with experience, and experience can only be obtained through multiple iterative cycles.
(*Scale economies achieved by AWS are automatically returned to customers in the form of lower prices. This is a formidable competitive advantage, a smart way to leverage scale. No such thing as an impenetrable moat, but when numero uno rebates scale economies, it's damn close.)
Amazon's phone: OMG, Could this be it?
I've been obsessing for weeks over the new services introduced at the AWS conference in Las Vegas in November. Boom! Boom! Boom! While competitors struggle to refine basic services, AWS casually dropped one industry-changing bomb after another at the conference, like it was no big deal. (I've still got the shakes.)
I won't go into Kinesis, which facilitates building big data apps on AWS, even though it is a major deal (data from sensors, in the buildout of the "Internet of things" will be processed using Kinesis). AppStream will have a profound impact on mobile and gaming. AWS does the processing for gaming (including graphics, even 3D renderings), then blasts pixels to the device.
WorkSpaces, in particular, has me thinking next-big-thing. And it may tie to Amazon's phone project, though if it doesn't, it's still a really big thing.
As always, try to connect the dots. Workspaces is currently aimed at enterprise (very large corporate customers). It's a niche product right now, one that employees of enterprise use to access their desktop anywhere, at home, on their computer, on their tablet. How's it accomplished? You connect to AWS via the Internet, AWS does all the computer work, then sends pixels back to you.
By the way, you pick up on one device where you left off on another device. (Called "persistency," it's quite a technical achievement.)
The pieces to the puzzle seem to fit: Amazon is working on a phone. AWS is all about centralization of compute for the corporate desktop, why not extend it? (It's the new mantra: Just send pixels!) And, yikes, have you considered this: isn't the commanding lead AWS has in compute infrastructure an advantage over other handset makers? If the smartphone is destined to be a pane of glass (and a bit more)? Hello, Samsung (OTC:SSNLF)?
The thinking here is no different than the rationale for self-driving cars and for cloud computing. We're headed to a new era of efficiency. Your smart phone - a supercomputer just ten years ago - is idle most of the time. Out of 24 hours, how much is that supercomputer capacity is working for you? 5%? 10%? Whatever it is, it's inefficient to have excess compute in your cell phone when it can be centralized. (Besides, when it's centralized, you have a Ferrari crunching code for you.)
Even if Workspaces technology doesn't tie to the phone project, the addressable market for Workspaces is a whopper. Imagine controlling the compute workload for the desktop and tablet market. A monopoly market, and the potential to move upstream …
Extend. Extend. Extend.
Can you see it?
My final three columns on their way
My dear cherubs, by the time you read this, this misfit has already slipped into the shadows, my pen retired. A mini-frenzy these past hours: I wrote the column above plus three more, Big Winners and Devastating Losers, Alibaba v. Amazon (I'll reveal a weakness in Amazon's model, Jack Ma has it targeted). I wrote a book review, too, included it in the Alibaba column. And then there's my final column, Confessions of A Crazy Stockpicker. Jeez, I already forgot what I wrote there … oh yeah, game theory … some wild-ass ideas too … plus one howitzer.
I'll put a column out there each day.
Until they're gone.
(Yes, yes, future big winners embedded herein … that's why I'm reminding you, sheesh.)