Despite the success and controversy over Amazon's Elastic Cloud 2 (EC2) cloud services offering, it's still a retailer. The value of Amazon (AMZN) shares have more than doubled since it launched its cloud services in 2007, but if you think you're buying a tech stock you are mistaken. Amazon doesn't break out EC2 revenues but it's clear the service has grown rapidly and changed the nature of business computing in fundamental ways. But it has not changed how investors should look at AMZN stock.
In 2009 Cloudscaling estimated EC2 was bringing in $220 million/year. A UBS estimate for 2010 was EC2 could bring in $500 million annually. Sounds impressive, but Amazon revenues for 2009 were $24.9 billion, and for 2010 they were $34.2 billion. Compared with other tech companies, Amazon brings a pitiful portion of that down to the bottom line. It reported operating income of $1.129 billion in 2009, $1.406 billion in 2010. In fact, when you look at Amazon's numbers on a quarterly basis, you'll always find a big spike in the fourth quarter, just like other retailers. Amazon's year is all about Christmas.
Contrast that with Google (GOOG), which had revenue of $23.9 billion in 2009 and operating income of $8.3 billion. Most analysts will tell you that what made Amazon zoom past Google in revenue for 2010 (Google brought in “just” $29.3 billion in revenue during that year) was its Kindle e-book reader.
The Kindle, from a financial perspective, is similar to the Apple iPad. The money comes from the razor blades, not the shaver. Caris & Co. estimates $5.42 billion in Kindle sales for 2011, “at least” $7.96 billion in 2012. The company, which began as a bookseller, acknowledged in the fourth quarter of 2010 that Kindle content sales had overtaken its own book sales.
Still, even the optimists say the Kindle represents just 15% of the company's business.
Thus, even combining Kindle and EC2 revenues, you're talking, at most of about $6 billion out of $34 billion in sales coming from tech. Stories about Amazon's cloud security, or its cloud marketing, are thus not terribly relevant from a financial perspective.
Amazon is still a retailer. Its technology makes it logistically superior to other retailers but it's not threatening Google, nor from a financial perspective is it a threat to Microsoft (MSFT). It's threatening WalMart (WMT).