In just a decade, Amazon’s (NASDAQ:AMZN) Web Services (AWS) has gone from an appealing idea to being a dominant business trend of the decade.
In March 2006, it started selling what it called “S3 services”, and by the end of this year it will have 17 data centers or “regions” generating $12 billion in business, with almost 25% operating margins.
If this was an end result, it would have been a fantastic one. But this market is still in its infancy and is just now beginning to take off. That means Amazon’s cloud ceiling is unlimited.
In mathematical terms, the Amazon Web Services is a “variable,” while the rest of Amazon is “fixed.” We already know how the store operates, and we know how the “fulfilled by Amazon” part of the business goes. We even have a really good grip on Amazon Prime.
The all-transforming trend
What we don’t know is the degree to which Amazon Web Services have transformed technology, commerce, and the media. RBC Capital Markets calls AWS “the most powerful trend in all of technology, media, and telecommunications today.”
Technology giants like IBM (NYSE:IBM) and HP INC (NYSE:HPQ) have been completely sideswept because AWS builds its own servers. Media giants like CBS (NYSE:CBS) and Viacom -B (NASDAQ:VIAB) have been bypassed by Amazon’s services for clients such as Netflix (NASDAQ:NFLX). Some of the biggest merchants like Gap (NYSE:GPS) or Walmart (NYSE:WMT) have been put off balance by Amazon’s growing dominance in the marketplace.
Amazon stock jumped from $300/share to almost $700/share in just 18 months, but then it fell below $500 earlier in the year. Now it trades in a range of $560-575. There is an upward bias that points to this being a good time for small investors to buy into the stock.
The slow move up is the result of concerns about some customers “graduating”, such as Dropbox, which has finally built out the infrastructure allowing it to go from storage into content collaboration.
This kind of churn is expected, but few companies, like Facebook (NASDAQ:FB), actually have the capital structure, not to mention the guts, to make it come to fruition.
The numbers look good
As a result, analysts like Morgan Stanley (NYSE:MS) still display “hockey stick graphs” for AWS, thinking the cloud infrastructure business it controls will be worth $38 billion this year, and by 2019 grow another 300 percent to an impressive $106 billion (with Amazon getting almost half of it). Morgan Stanley says that the platform and software parts of the business will not go over the infrastructure growth rates until the following decade. Platforms and infrastructure are at the heart of the Amazon market.
One might argue that Amazon’s $275 billion market cap is “stretched” since it values the company at greater than 2.5 times its annual sales from last year. That’s very high for a retailer, but Amazon isn’t a retailer, it’s an infrastructure company. The key to the infrastructure is AWS. The $12 billion in anticipated 2016 revenue should be valued at 12x sales, which means all else will be worth about the same as revenue.
Amazon stock is getting to be like Apple, a stock you own rather than trade, one that’s growing into its current valuation and more over time.
[Featured image credit: Spencer Platt / Getty Images]