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  • Should You Buy What Amazon Is Buying? 1 comment
    Oct 28, 2011 12:42 PM | about stocks: AMZN, INFA, ORCL, MSFT, AAPL, NTAP, RHT, CSCO, JNPR
    While reading the Q3 earnings report for Amazon (AMZN) , there were two statements which caught my attention. 
     
    Amazon is making "additional investments in support of continued business growth, including investments in technology infrastructure, including Amazon Web services and capacity to support our fulfillment operations. 
     
    And a response from Thomas J. Szkutak to a question from Colin A. Sebastian during the Q&A
     
    Demand for the Kindle Fire has exceeded any and all expectations and we have had to build “millions more” than planned.

    The Kindle Fire statement reminds me of the demand generated by the release the Apple (AAPL) iPhone and iPad many years ago. Not only did stores sell out in record numbers, but the carrier network  was overloaded with activation data and traffic. Amazon sees this kind of future demand with their release of the Kindle Fire and is investing in new infrastructure to support this growth.  These investments will help Amazon attract and keep all new found Kindle customers.

    So, what is Amazon buying with these investments?

    Having been in the IT field myself for over 20 years, I know anytime a company invests in technology infrastructure and capacity, they are also going to need highly skilled people to support this new infrastructure.

    To get an idea of what technology products Amazon is buying, I took a quick look at the career listings on the Amazon web site. Listed below are the technology skill sets Amazon is looking for and the stocks most associated with them.
     
    Technology Skill Set
    Company
    Stock Symbol
    Informatica
    Informatica Corporation
    Oracle DB
    Oracle Corporation
    Windows
    Microsoft Corporation
    Mac/OS
    Apple Inc.
    AAPL
    NetApp Appliances
    NetApp Inc.
    Linux
    Red Hat Inc.
    Cisco OS
    Cisco Systems Inc.
    Juniper Configuration
    Juniper Networks

    Informatica Corporation (INFA) recently reported Q3 earnings per share beat analyst estimates which make this the thirty-fourth consecutive quarter of sustained year-over-year revenue growth.
     
    Oracle Corporation (ORCL) earnings per share have grown by an average of 15.2% a year since 2001 and are on track to increase for 2012.
     
    Microsoft Corporation (MSFT) currently has earnings per share of $2.75, giving it a price to earnings ratio of 9.7. This is more than half the industry’s ratio at 20.7 and under half the S&P 500’s ratio of 17.9.
     
    Apple Inc. (AAPL) even with the recent earnings miss, Apple has enjoyed positive EPS growth rates for well over the past five years.
     
    NetApp, Inc. (NTAP) saw profit fall last quarter. Net income for the data storage device company fell to $139.5 million (34 cents per share) vs. $150.7 million (40 cents per share) a year earlier..
      
    Red Hat, Inc. (RHT) expects non-GAAP EPS between $1.03 and $1.05 per share, and revenue projections have been raised by $45 million to $1.12-$1.13 billion.
      
    Cisco Systems, Inc. (CSCO) has a one year EPS growth rate of 6.2% and the stock has risen 20% in the past three months.
     
    Juniper Networks (JNPR) is second only to Cisco in network and telecommunications and has recently seen a two year low in stock price.

    In addition to the companies I just identified that Amazon is buying, I would like to mention three more and why.

    Intel Corporation (INTC) provides the processing power for each and everyone of the technologies Amazon is investing in.

    VMWare, Inc. (VMW) is one of the virtualization leaders in technology today and their product is compatible across multiple platforms.

    Seagate Technology (STX) produces many of the hard drives found in all the computing systems which Amazon is buying. 

     


    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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    The problem with your assumptions is that you didn't really follow them through.

     

    Virtualization in Amazon's computing infrastructure is done Xen, which means they're not buying large quantities of VMWare. Even with a steep discount from what VMW charges for its products, the whole of EC2 wouldn't be anywhere near cost-effective. I don't doubt that Amazon uses VMWare, but not in quantities that make a difference in the price of VMW.

     

    The same goes for Red Hat. Amazon runs tens or hundreds of thousands of servers, and you can bet they're not paying Red Hat for RHEL support for every one of them. Linux distributions can be maintained and built from scratch, which makes it far cheaper to hire a fistful of people who understand how to do that, plus they get their own customizations without having to pay some third party a ridiculous amount to do it.

     

    MSFT? Amazon does the bulk of its production computing on Linux. They have about 34,000 employees, and if you figure that two-thirds need a Windows machine, that's not a tremendous pile of revenue headed Redmond's way. You could make a better case for buying MSFT based on Ford Motor Company's use of their products.

     

    INTL? That's a crapshoot. Like Google, Amazon uses commodity computers, and if they're smart they're not doing anything to tie themselves to Intel, AMD or even the x86 platform. Watch what happens when ARM-based servers start to appear in quantity.

     

    STX? Again, commodity. Whoever's got the best deal gets the business. A production environment needs diversity anyway.

     

    AAPL? Amazon probably has Macs in house for the same reason most other companies do: designers and artists like them, they excel in publishing and they need to make sure their web site is compatible with Safari. And while they'll need some people to administer those systems, they're not buying millions of them.

     

    I'll leave the ones I didn't mention for you to contemplate.
    6 Nov 2011, 02:36 PM Reply Like
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