If there’s one thing Wall Street has been forced to learn about Amazon.com, Inc. (AMZN) in the last year and a half or so, it’s that Amazon Web Services, or AWS, is absolutely vital to the company’s growth. Looking at an AWS growth chart will tell you that in an instant.
Amazon’s tremendous first-quarter earnings on Thursday only confirmed that once more for investors. The e-commerce giant cruised past earnings and revenue expectations, and AMZN stock owners were rewarded with a 9% rally that sent shares past $650.
But while we all know Amazon Web Services is important to Amazon’s future, sometimes it’s easier to understand visually. Let’s take a look at a few important AWS growth rate metrics plotted over time to get a better idea of the cloud computing arm’s real impact.
AWS Growth Chart 1: Profitability
The chart below helps illustrate what is arguably the most powerful thing about Amazon Web Services, at least as far as AMZN stock is concerned: Its incredible margins.
You probably remember that Amazon had an incredible year on Wall Street in 2015. In fact, next to Netflix, Inc. (NFLX), which soared 145%, Amazon was the best-performing stock in the entire S&P 500. The main reason AMZN stock earned investors a 124% return in 2015 was its sudden return to profitability.
Much of that profitability was due to Amazon Web Services, which has extremely high margins when compared to the rest of Amazon’s business. You can see the outsized impact of AWS on Amazon’s overall profitability in the chart below, which shows Amazon Web Services’ operating income as a percentage of Amazon’s company-wide OI (excluding stock-based compensation):
AMZN only started breaking out AWS metrics in Q1 of 2015, so we don’t know what this chart would’ve looked like going back a few years, but what’s most striking is that while Amazon Web Services only accounts for between 7% and 9% of Amazon’s revenue, it generates between roughly one-third and one-half of the company’s total operating income.
AWS Growth Chart 2: Revenue Growth
For the second Amazon Web Services growth chart, I thought it might be useful to see, you know, growth. AMZN, which is no slouch in its own right, routinely posts revenue growth rates vastly inferior to AWS.
In fact, excluding the most recent quarter, Amazon Web Services routinely grows about 3 to 4 times faster than its parent. We can see that the AWS growth rate has generally decelerated in recent quarters, but we certainly can’t expect it to keep up 80% annual growth rates forever, can we?
AWS Growth Chart 3: AWS % of AMZN Revenue
These figures are actually shown on the orange line in AWS Chart 1, but that didn’t give you a great sense of its growing importance to AMZN.
Now, a few things stick out here. Obviously, the sudden pullback in Q4 of 2015 catches an eye. Thankfully, there’s a simple explanation for that.
AMZN is a seasonal business, and the fourth quarter (holiday season) is always the hottest of the year for retailers. Because Amazon’s Q4 revenues are routinely much higher than the other quarters of the year, Amazon Web Services’ revenue contribution will be less meaningful, relatively speaking.
You might also be thinking that 6.7% to 8.8% of overall revenue really isn’t that much. That’s a little unfair though, especially when you consider than AWS increased its overall revenue share in Q1 2016 by 210 basis points from Q1 2015. Given its share was only 670 basis points to begin with, that’s a 31% (210/670) year-over-year gain.
Extrapolating that growth rate out, here’s a year-by-year breakdown of Amazon Web Services revenues as a percentage of AMZN’s total revenue:
- Q1 2017: 11.5%
- Q1 2018: 15.1%
- Q1 2019: 19.8%
- Q1 2020: 25.9%
- Q1 2021: 33.9%
- Q1 2022: 44.4%
You get the picture. By 2023, seven years from now, Amazon Web Services would account for 58% — more than half — of Amazon’s overall revenue.
The charts and numbers laid out above show exactly why analysts are so gaga over Amazon Web Services, and why shareholders should track AWS growth carefully over time. Microsoft Corporation (MSFT), Alphabet Inc (GOOG, GOOGL) and others are trying to catch it, but today it remains the best pure cloud computing player out there.
As long as AWS continues to dominate, AMZN stock will be in good shape.
As of this writing, John Divine was long AMZN stock. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
