Amazon Stock and the Outsized Role of the Cloud (AWS)

Amazon (AMZN) stock is surging on Friday after Amazon earnings blew expectations out of the water. Namely, Amazon actually had earnings, and analysts sure didn’t expect that.

amazon-amzn-stockAnalysts on average were looking for a loss of 14 cents per share of AMZN stock, but AMZN posted positive EPS of 19 cents instead.

A not-so-little division called Amazon Web Services was largely responsible.

With shares up as much as 17% in after-hours action, Mr. Market added around $38 billion to Amazon’s valuation in a matter of minutes.

While we all know Amazon is a powerful force in e-commerce, its strong results were also driven by amazing performance from its cloud operations, which helped boost margins and swing the company to profitability.

Any AMZN stock investor should have a grasp of how Amazon Web Services (AWS) plays into the larger company. Let’s take a gander at its operations.

AWS: The Hidden Catalyst Behind AMZN

Well, maybe it’s not so hidden anymore, but Amazon Web Services, the undisputed leader in enterprise cloud-based services, is a profit-making machine. It’s helping AMZN CEO Jeff Bezos finance the rest of the company’s low-margin/long-term/longshot projects like same-day delivery, Amazon Prime Video and Amazon diapers, among many others.

This is just the second quarter where the company has broken out results for AWS, but the way the segment is growing, it certainly won’t be the last. AWS revenue jumped 81% year-over-year, clocking in at $1.8 billion in the quarter. To be honest, that’s not a huge chunk of Amazon’s overall revenue, which came in at $23.2 billion (beating expectations as I predicted), but it’s something.

AWS was just 7.9% of the company’s total revenue, but its operating income of $391 million was a remarkable 36.4% of AMZN’s total operating income of $1.08 billion. (Amazon lists operating income of $464 million, but that backs out stock-based compensation; the larger figure makes for a more accurate assessment.)

Still, even the $1.8 billion in AWS revenue is nothing to scoff at — especially considering that as of last quarter AWS made more from cloud operations than its four biggest competitors combined. That’s right, Salesforce (CRM), Microsoft (MSFT), IBM (IBM), and Google (GOOG, GOOGL) are all scrubs.

And scrubs, as TLC noted 16 years ago, don’t get no love.

In the most recent quarter, AWS proved once again that it’s no scrub. Below is a list of its recent accomplishments., taken directly from the press release. AWS…

  • …launched 350 significant AWS features and services so far this year
  • …announced that it will open a new region in India in 2016, which will enable customers to run workloads in India and serve Indian end-users with even better latency.
  • …announced AWS Educate, a free program that helps educators and students use real-world cloud technology in the classroom to prepare students for the cloud workforce.
  • …announced Amazon API Gateway, a new fully managed service that makes it easy for AWS customers to create, publish, maintain, monitor, and secure APIs at any scale.

Amazon Web Services will also support the company’s solar and wind farm projects designed to power current and future AWS data centers, creating more efficiency. Bezos said that the new projects would be enough to exceed the company’s goal of sourcing 40% of its energy from renewable sources by 2016.

AWS is also the brain behind the company’s artificial intelligence-powered speaker, Amazon Echo. I’m convinced that all this — which is quite a laundry list of accomplishments already — is just the tip of the iceberg for AWS as more and more cloud applications emerge from the ether in the years ahead.

In short, e-commerce is nice, but the cloud is where the money comes from.

As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/07/amazon-amzn-stock-aws-cloud-computing/.

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