With Cloud Becoming Fog, How Far Will Amazon Fall?

Aug.18.11 | About: Amazon.com, Inc. (AMZN)

While Amazon.com (NASDAQ:AMZN) draws most of its revenue from its online stores, its stock trades like a tech stock, specifically a cloud computing stock.

Even with recent drops in price its multiple still sits north of 89. This only makes sense if you compare it to such companies as VMWare (NYSE:VMW) (a P/E of 71), RedHat (NYSE:RHT) (a P/E of 64) or RackSpace (NYSE:RAX) (a P/E of 86).

Buyers' expectations are that Amazon will grow earnings much, much faster than Apple (NASDAQ:AAPL) (a P/E of 15), Google (NASDAQ:GOOG) (a P/E of 19) or IBM (a P/E of 14). Are Amazon's earnings really worth nearly six times more, dollar for dollar, than those of Apple?

Seen for what it is as a company, a bookstore that sells other merchandise, why isn't it priced more like WalMart (NYSE:WMT) (a P/E of 12) or Target (NYSE:TGT) (also a P/E of 12)?

The reason is that its Amazon Web Services unit was the first mover in the cloud, and that its EC2 architecture remains an industry standard. The hope is that enterprises will dump their existing server farms over the next few years and move en masse to Amazon in order to save money, making the company very, very rich.

Optimists may point to news like today's announcement of GovCloud, a special region within AWS that allows government customers to comply with regulations regarding where data is stored, as evidence the company “gets it.”

But whether or not Amazon “gets it,” the question should be how much is there to get? Yes, governments are looking to cloud computing to save money, but why wouldn't they do that through existing vendor relationships, like those with CSC. Selling to government is a specialized activity – you don't get the deal just by putting up a cool offer.

Amazon's ambitions are also an enormous threat to every major enterprise software giant out there. IBM, Oracle (NASDAQ:ORCL), HP (NYSE:HPQ), Dell (NASDAQ:DELL) and others are busy right now soothing their biggest customers that “they can do cloud,” that “you need a private cloud,” one they should build and manage so as to minimize disruption and maximize long-run savings.

In other words, investors are betting very heavily on Amazon's ability to execute a full computing paradigm shift and dominate it against the world. Otherwise the current stock price makes no sense. Or is it the assumption that makes no sense?

Disclosure: Still got those 20 GOOG shares sitting in the old IRA, bouncing up and down. "Madam, prices will fluctuate," as Paul Volcker said.