Cloud Wars: Understanding The Appeal Of Amazon’s AWS – TheStreet

AWS, also known as Web Services, is Amazon’s  (AMZN) – Get, Inc. Report cash cow. The segment generates about $8.4 billion dollars in operating income. Think about AWS as the Netflix for IT solutions: rather than individually purchasing and maintaining physical data centers, enterprises pay for a subscription to AWS. In the end, clients benefit from better service and lower costs.
Not unlike streaming movies and music, cloud computing has become a huge market of $370 billion in 2021 and expected growth of nearly 20% YOY to $1.2 trillion in 2028. Giants like Alibaba, Google, IBM, Microsoft and Oracle are fighting Amazon for a large slice of the market.
Today, the Amazon Maven talks about AWS in more detail, and explains why this could be a crucial piece of the investment thesis on Amazon stock.
Figure 1: Amazon Web Services logo.
(Read more from the Amazon Maven: 55,000 New Reasons To Be Bullish Amazon Stock)
AWS can be broken into two main products. The first is EC2, a virtual machine service which, according to Bhavan Suri, co-head of technology equity research at William Blair, is the most profitable within AWS. Since most firms do not need constant computing performance, EC2 allows them to lower costs by purchasing the subscription service that better suits their needs. According to the AWS website, EC2 Reserved Instances can be 75% cheaper than on-demand instances.
The second is S3, a storage service similar to the popular Apple Cloud, Dropbox and Google Drive. Recently covered in a CNBC’s article, S3 is noted for replacing expensive servers and equipment that companies use for running their websites and other needs. AWS storage’s greatest competitive advantage has become its capacity to cut storage expenses for its users through scale.
AWS’s client base includes some of the world’s largest companies, such as Samsung, McDonalds’ and BMW. Not surprisingly, Amazon’s titanic cloud business controls over a third of the market at 32%, with Azure following behind at 20%, and Google Cloud at 9%. AWS is the market leader in the IaaS and PaaS categories, the highest growing segments in the cloud services industry.
The Seattle-based e-commerce behemoth has been capturing market share over time. From 2017 to 2020 AWS’ revenues increased an average of 40% yearly, more quickly than the broad space. The pandemic did not slow down AWS’ business, as revenues continued to grow strongly, and margins climbed from 24.8% in 2017 to 29.8% in 2020.
Figure 2: AWS revenue TTM.
Visualized Analytics
Solutions for cheaper and more efficient operations will likely continue to be a priority for most, if not all businesses. Companies ranging from start-ups and to multinational businesses can benefit from AWS services at scale for their computing needs.
At the same time, the costs for developing and constantly updating cloud technologies and infrastructure form a barrier to entry for competitors, with even giants like Google struggling to keep the pace. Since AWS seems to have the upper hand on the market, it is certainly shaping up to be a winner in the cloud wars — which we think justifies buying and holding AMZN stock.
How important do you think Amazon’s AWS (i.e. cloud business) is to the investment thesis?
Looking at a company’s business fundamentals is only half the work needed to find a good stock. How much one pays to own the shares is a key factor in the success of any investment. This is why valuation analysis is so important.
Alpha Spread’s user-friendly platform allows you to estimate a stock’s fair value –through valuation multiples, discounted cash flow, and more. I believe that the service is a must for anyone looking to own the right stock at the right price. Check out and get started with a 7-day free trial.
Alpha Spread
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting The Amazon Maven)
Equity research contributor for DM Martins Research, covering Amazon and the retail space at large. Economics and accounting background from the University of Sao Paulo, one of the top finance universities in Brazil.
I am the founder of DM Martins Capital Management LLC, a Napa-based hedge fund manager formed in January 2020. I am also the current head researcher and portfolio strategist of independent firm DM Martins Research.