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GOOG Cloud Computing Push Weighs on AMZN Stock

AMZN stock and GOOG stock are both hot this year


Google (GOOG) is pushing harder into cloud computing services, which scared investors in Amazon (AMZN), Rackspace Hosting (RAX), and Digital Realty Trust (DLR) this week.


The push by GOOG had been predicted for some time, but AMZN stock, RAX stock, and DLR stock still suffered after the Monday announcement.

While recovering somewhat today, Digital Realty stock decreased 4% yesterday and Amazon stock fell 2%. That hardly puts a dent in the broader gains for AMZN stock this year … but it could be bad news long-term.

GOOG vs. AMZN Battle Heats Up

“Shares of data center and hosting stocks are under pressure today,” wrote Stifel Nicolaus analyst Todd Weller in a research report Tuesday. “We believe the key driver of the weakness likely relates to the announcement of the general availability of Google’s Compute Engine public cloud service nearly 18 months after it was initially announced.

“We believe the pressure relates to concerns around increasing competition in the public cloud space, with Google’s effort joining the ranks of other large tech companies that are stepping up their efforts to compete with market leader Amazon Web Services, (as well as) IBM (IBM) (acquisition of SoftLayer), Microsoft (MSFT) with its Azure offering, and VMware (VMW), to name a few.”

Amazon stock investors were especially worried because the company has made cloud computing part of its growth model. The push from GOOG into this territory could take a bite out of AMZN momentum.

As InvestorPlace noted previously, investors don’t know just how much Amazon Web Services (AWS) pulls in for the AMZN stock bottom line, and it’s likely a small part of the total.

AWS is one of many Amazon “services.” According to the 2012 Amazon 10-K, the services segment includes third-party seller fees earned and non-retail activities such as AWS, advertising services and Amazon’s co-branded credit card agreements. In 2012, total services sales for AMZN were $9.36 billion.

Amazon also breaks its sales down by “media,” “electronics and other general merchandise” and “other,” which counts sales from non-retail activities — including AWS in the North America segment. For 2012, the North America “other” total was $2.35 billion for AMZN. Analysts currently estimate that AWS generates roughly $3 billion in annual revenue.

No matter how you slice it, it’s clear the AWS total is a small sliver of the company’s $61 billion total, making up less than 5% of its overall sales if we use analyst numbers.

But that small size means there is the potential for huge growth for the cloud business and AMZN stock — especially since AWS boasts thicker margins. At the same time, Amazon is ahead of its competitors in the cloud computing services and recently added a huge government contract worth up to $600 million over four years.

Yes, even as big tech-first names such as Hewlett-Packard (HPQ), Citrix (CTXS), Oracle (ORCL) and VMware (VMW) are all trying to get push hard to get slice of the market, AMZN leads the herd.

Once again, that Google’s foray into cloud computing could further hit AMZN stock and other IT rivals. With other companies all trying to get a piece of the pie, AMZN stock and other IT stock could feel the pressure over the long haul if Google’s initiatives pay off.

Cloud computing will generate about $131 billion this year and is growing at an annual rate of 47%.

AMZN stock is up 55% year-to-date. GOOG stock isn’t far behind with a 50% climb over the same period.

Article printed from InvestorPlace Media,

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