Tuesday, April 28, 2015

Amazon Cloud – The Profitable Part of AMZN

AWS is the only real profitable part propping up AMZN stock

On Thursday, Amazon.com, Inc. (NASDAQ:AMZN) reported earnings for the first quarter of 2015. The Seattle-based tech giant beat analyst estimates, posting first-quarter revenue of $22.72 billion, a 15% year-over-year gain.

However, more impressive than the earnings beat were the numbers for Amazon Web Services, which — for the first time ever — were broken down in detail.

Prior to the Q1 earnings call, AMZN provided only vague details about the Amazon Web Services cloud computing business, lumping figures together in the generic “Other” category. In January, however, management announced that specific AWS results will be provided beginning with the 2015 Q1 earnings release.

On the earnings call, CEO Jeff Bezos stated, “Amazon Web Services is a $5 billion business and still growing fast — in fact it’s accelerating.” In looking at the Amazon earnings report, the cloud component has been performing much better than the AMZN core retail operation, which generated lower operating margins of 1.1%, and a loss of 12 cents per share. This translated into a total first-quarter loss of $57 million.

Amazon Web Services generated revenue of more than $4.64 billion in 2014, with operating income of $660 million. Profit for the year was $77 million. Management revealed that nearly $7 billion in assets was tied to AWS as of the end of Q4 2014.

Operating expenses for Amazon Web Services in the first quarter of this year were $1.3 billion, a 61% jump from $805 million in the first quarter of 2014. AWS raked in nearly $1.57 billion during the first quarter of this year, representing a 49% increase from the $1.05 billion collected in Q1 of 2014. Profit was $265 million, and margins remained relatively unchanged at 17%.

AMZN Leaning Heavily on AWS

Bezos attributed the impressive success of the Amazon cloud business to “two seemingly contradictory traits: impatience to deliver faster and a willingness to think long term.” He described AWS as “a good example of how we approach ideas and risk-taking at Amazon.” Indeed, those risks have paid off over the past 10 years since the launch of the Amazon Web Services business, and AMZN shareholders have been well rewarded.

Following the AMZN earnings report, shares jumped almost 15% at the start of trading the following day. Clearly, investor confidence in the future of the Amazon cloud business is strong. If AWS continues to grow at the same pace, it could be responsible for as much as $7 billion in revenue by the end of this year.

Amazon Web Services is the company’s fastest-growing division, and one of the top cloud-computing platforms for businesses looking to utilize data storage and processing power without the expense of maintaining their own server farms. AWS serves businesses of all types and sizes, from the tiniest tech start-up to industry behemoths like Netflix, Inc. (NASDAQ:NFLX) and even the CIA.

Amazon earnings will continue sinking as the retail business suffers, while the Amazon cloud business will continue growing and expanding to provide even more comprehensive services to accommodate larger enterprise customers. The two divisions of the company are heading in opposite directions, tied together by nothing but the fraying rope that is Amazon Prime.

Without a major overhaul in Amazon’s retail segment, AWS might end up being the only thing holding up AMZN stock, considering that management estimated the company’s overall loss could be as high as $500 million for Q2. Eventually, Amazon Web Services may become so separated from the AMZN core retail business that an aggressive, Icahn-like activist investor could exert pressure on Bezos to separate the two.

Article originally appeared on InvestorPlace (04/28/2015)

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