Amazon.com's AWS Is Much More Valuable Than We Thought

Apr. 23, 2015 7:15 PM ETAmazon.com, Inc. (AMZN)79 Comments
Brian Nichols profile picture
Brian Nichols
8.72K Followers

Summary

  • AMZN's first reported financial results for AWS were way above expectations, on the bottom line.
  • AWS's valuation has been estimated up to $50 billion, making the asset appear cheap compared to other cloud names such as Salesforce.com.
  • After reporting financial results, AMZN has set the stage to explore its options, possibly a spin-off of AWS, leading to much larger stock gains.

Amazon (NASDAQ:AMZN) reported figures for its cloud services business, Amazon Web Services (AWS), for the first time in its history. Turns out, the company should have done it sooner, as AWS looks to be a much better-performing asset than anyone figured, and may lead to much larger gains by itself.

Up until this point, analysts have had no foolproof way to gauge AWS's operating performance. Among the most reliable methods was to use Synergy Research's estimates or to assume that Amazon's North American Other revenue was a reflection of AWS. However, what we didn't know, and couldn't know, was the asset's high profitability - which is surprising, to say the least.

AWS controls about 30% of the cloud infrastructure services market, a market that did $16 billion in revenue last year and grew 48% year-over-year. AWS's reported growth of 49% year-over-year and revenue of $1.57 billion is about what experts thought - nothing too surprising there. However, its $265 million in operating profit is shocking.

For those who haven't followed the cloud services story over the last year, the industry has undergone a series of aggressive price cuts and changes. Amazon, Microsoft (MSFT), Google (GOOG, GOOGL) and other leaders have cut prices on popular cloud services by north of 70% year-over-year. Yet, despite these cuts, revenue growth remains robust.

That said, Amazon's AWS operating profit only grew 8% in the quarter, illustrating that margins did decline in response to those price cuts. Yet, who cares? The business has an operating margin of nearly 17% - a shocking surprise to the many who figured Amazon was barely breaking even with AWS, if not unprofitable.

Now, the beauty to AWS's business model is that it is mostly recurring revenue. It is not typically seasonal, meaning that revenue has consistently grown on a quarter-to-quarter basis. AWS clients

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Brian Nichols profile picture
8.72K Followers

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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