Cloud Becomes A Bank For Amazon Global Domination

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

Summary

Analysts now estimate Amazon Web Services to be worth $150 billion.

The unit is now able to generate greater profits at lower capital intensity than rivals.

Cloud profits enable Amazon to seek global domination in e-commerce and entertainment.

Amazon $1,000 is not as far-fetched as bears make it seem.

A flywheel effect lets an electronic component continue to run even after being powered down. You can also think of this as freewheeling, a bicycle continuing to accelerate down a hill after the rider stops pedaling. Or think of it as having a lot of rocket power behind you even after you get into orbit.

Whatever you call it, Amazon.com (NASDAQ:AMZN) has it, which is leading analysts to estimate the value of Amazon Web Services at $150 billion, and pound the table for the stock.

A recent research note from Oppenheimer notes that Amazon can now deliver its data centers at much higher capital intensity than before, 100,000 square feet of space costing $376 million and generating returns of over 20 percent.

This is not just happening for Amazon, but for the other major cloud providers, like Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL), Microsoft (NASDAQ:MSFT) and IBM (NYSE:IBM). As a result, Oppenheimer says clouds that now have almost half the world's total compute capacity will have nearly two-thirds of it by 2020.

Why then buy Amazon? Because, according to Evercore analyst Kent Sena, the lead of AWS in the infrastructure market is so great that customers are going to naturally transition into platform services with names like Redshift, QuickSight and Elastic Beanstalk without major new inputs of capital. Amazon managed service partners will move it into higher value-added services at almost no cost.

What does this mean to the bottom line? Last year, Amazon cloud revenues came in at $7.88 billion, up 70%, and profits from the unit came in at $1.86 billion, up 182%. Cloud represented 7% of Amazon's total revenue, but 83% of operating profit. The cloud infrastructure market that Amazon leads is expected to double revenues, to $141 billion, within the next five years, and AMZN should get the lion's share of that.

Most of that money will not flow directly to the bottom line, or to shareholders in the form of dividends. Most of it will go into expanding Amazon's e-commerce offerings in places like India, where it will invest $3 billion this year, or into expanding Amazon Prime video services. Amazon's cloud, in other words, is going to become its bank, making it ever more difficult for companies like Wal-Mart (NYSE:WMT) to catch up in e-commerce or Netflix (NASDAQ:NFLX) to catch up in entertainment.

At its present valuation of about $300 billion, with $150 billion taken off the top for cloud, Amazon is a $100 billion business valued at $150 billion, or 1.5 times sales. The growth of that business is going to be supported by cloud profits, meaning it could grow even faster than currently expected.

This is why Amazon $1,000 is not as far-fetched a proposition as many think.

Disclosure: I am/we are long AMZN, GOOGL, MSFT.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.