A less than stellar earnings report has sent Amazon’s (Nasdaq: AMZN) stock tumbling 20% from its 52-week high just over a week ago.
Apparently, the 44% jump in revenue wasn’t enough to boost profits. Analysts were expecting $0.24 per share, but earnings only reached $0.14 per share, down from $0.51 last year.
Much of that loss can be attributed to its surge in operating expenses, which grew by 48% over 2010. And the segment that saw the biggest growth in this category includes the company’s burgeoning cloud-computing branch, Amazon Web Services (AWS).
While some analysts see this increased spending as a negative, it’s actually an opportunity in disguise. And not just for Amazon…
Five Million Consumers About to Crowd Amazon’s Servers
With AWS, companies don’t have to worry about sudden upticks in internet traffic crashing their websites. Amazon’s servers adapt to accommodate usage spikes in real-time.
So why is the company focusing on AWS expansion now? Two words: Kindle Fire.
The tablet’s most attractive feature is its proprietary internet browser, Silk.
Basically, Silk allows consumers to tap into the power of Amazon’s cloud-computing servers, too, which translates into a massive speed boost while surfing the web.
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Sure enough, Amazon sold 95,000 units on the first day of pre-orders. The company’s “building millions more” than expected to keep up with the unprecedented demand. And JPMorgan (NYSE: JPM) estimates consumers could scoop up five million devices during the holiday season.
With that many data-hungry users about to plug directly into its web servers, Amazon realized that it needed to beef up its data centers ahead of time.
So that might mean decreased profits in the near term. But the move should keep Kindle Fire users happy, which would lead to more tablet sales – and increased profits – down the road.
Amazon’s not the only company set to benefit from its data center expansion, though…
The Backbone of AWS
As a provider of server hardware for Amazon’s cloud-computing unit, Silicon Graphics International (Nasdaq: SGI) is in the perfect spot to cash in on the retail giant’s latest move.
Amazon is SGI’s biggest customer, accounting for around 20% of the data storage company’s revenue.
Not to mention, SGI’s new flagship storage product boasts 16 times more shared memory than anything else on the market right now. That makes it an attractive solution for Amazon’s expansion efforts.
Bottom line: I’m convinced that Amazon’s move to beef up its cloud-computing backbone will lead to solid earnings ahead. And in the meantime, SGI offers the closest thing to a pure play on the growing popularity of AWS we’ve found so far.
The fact that the stock has cruised up 14% since Amazon released its earnings report proves that some investors have the same idea.