Why Amazon’s True Value is in the “Clouds”
Geography teachers might not like it… but these days, you’re more likely to associate the word “Amazon” with “super-saver shipping” or “Kindle,” rather than “a river in South America.”
Heck, even a Google (Nasdaq: GOOG) search for “Amazon river” produces a list of books to buy on Amazon (Nasdaq: AMZN) before listing the Wikipedia page for the actual river.
A sign of the times, or what?
But it’s not the only confusion happening, though.
Most investors think of Amazon as just an online retail giant. But did you know that the company is also a formidable competitor in the cloud computing market? So much, in fact, that its true value could soon be based on its cloud-computing branch called Amazon Web Services (AWS).
Let me explain…
Amazon AWS: Cutting Costs… Saving Space
Amazon’s AWS – and cloud computing for that matter – is not a complicated business.
Basically, AWS leases server space and computing power to other companies. And by piggybacking off Amazon’s servers, companies can store massive amounts of information without needing to expand their own data infrastructure.
The information is all stashed away at one of Amazon’s global data centers, which means two things for firms who hire Amazon’s AWS services:
- Cut Costs: Mega data centers cost upwards of $500 million each.
- Save Space: These data centers can span up to 700,000 square feet.
AWS isn’t all about storage, though. It’s also about simplifying critical business functions…
For instance, Netflix (Nasdaq: NFLX) runs all its streaming content through AWS. And social gaming developer, Zynga – the company behind Facebook’s “Farmville” game – used AWS to support its servers when it launched the game in 2009. According to Zynga’s VP, “Had we done that in a traditional data center, there’s no way we could’ve scaled our infrastructure.”
Companies can also “rent” Amazon’s computing power to analyze data, which gives even the smallest firms the ability to track trends as easily as the big boys.
In the Clouds… And Off to the Races
Simply put, cloud computing is a hyper-growth market. Research firm IDC expects the cloud computing market to blast to $56 billion in 2014 – up 250% from $16 billion in 2009.
It’s also clear that a few tech juggernauts like AT&T (NYSE: T), Hewlett-Packard (NYSE: HPQ), and IBM (NYSE: IBM) stand to reap significant rewards from the growth. After all, they currently control about 95% of the market.
But I assure you that Amazon is quickly claiming its share, too – and it promises to be a formidable competitor.
Amazon Barging its Way into a Massive Growth Market
AWS Senior Vice-President Andy Jassy says Amazon has “hundreds of thousands of customers” using AWS. And according to estimates from Barclays Capital and Lazard Capital Markets, AWS generated around $500 million in revenue over the last year.
You know what that means: AWS is climbing at a faster clip than the company’s e-commerce business, according to Caris & Co. analyst, Sandeep Aggarwal.
And it’s more profitable, too.
In 2011, AWS could collect upwards of $900 million in sales, with operating margins at 23%. By comparison, Amazon’s e-commerce business operates at a 5% margin.
Bottom line: Amazon is poised to take advantage of another massive market. You’d think Wall Street would get it. But it doesn’t. For example, when the company announced in January that it would ramp up spending on data centers, the stock plummeted 8% in four days.
Now that you know the truth, don’t be similarly blind to the potential here.
Good investing,
Justin Fritz
Related Topics: Stocks, Tech and Innovation
