Ask anybody how Amazon.com, Inc. (NASDAQ:AMZN) makes its money and, chances are, they’ll say it’s an online retailer. There’s no denying that the company is a behemoth in the e-commerce space and all but invented the category back in the go-go days of the dot-com boom. It’s also a fact that Amazon still gets the bulk of its revenue from online sales.
But, there’s more driving AMZN stock than just online sales.
Jeff Bezos and Company have created an interesting web services business on the side. Through its own data collection efforts, Amazon has continued to expand on that premise and is now one of the rising stars in cloud computing and data analytics. It’s in these projects that AMZN could see the biggest growth down the road.
For investors, the continued growth in its web services and data center division might be the most promising driver of AMZN stock over the long term. It’s pretty clear that Amazon is much more than just another retailer.
It’s All About Data at AMZN
Believe it or not, Amazon and Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) have a lot in common. Yes, one is a search/advertising company and the other is a retailer. But, they share a love of data. A lot of it. Terabytes worth of information.
Every time you perform a search on Google or send an email via Gmail, Google is quietly searching through all your information, using complex algorithms to tease out whatever information it can. Advertisers love this info and it’s what has made GOOGL a powerhouse.
Guess what? AMZN is doing it too.
Every time you search, buy, or buy again, Amazon is collecting millions of pieces of information. The company stores and processes that information on its vast server computers. For years, AMZN quietly did all of this collection and analyzation behind the scenes. But, one day, Bezos and his cohorts had a thought: “If we’re collecting and searching through all this data, I bet someone else is, too.” And, just like that, the Amazon’s Web Services (AWS) division was born.
Initially, AWS was simply an outsourced server farm. You could contact Amazon to host your business processes on one of its data center sites and access it via the cloud. Thousands of smaller businesses flocked to this easy-to-access “public cloud” as the costs to implement it vs. the cost of building out an entire IT infrastructure are next to nil. Revenue for AWS has grown more than 55% year over year.
AMZN Stock Hooks the Big Boys
But, just offering a space for storage isn’t the end of Amazon’s cloud computing endeavors. AMZN has continued to build an entire ecosystem of tools and software designed to massage its customers own data analytics, as well as provide access to some of its generated data. Since 2014 (when the business launched) Amazon has added over 500 features and software tools.
Its latest pushes are designed to attract Fortune 500 companies to its cloud services.
These include a host of new artificial intelligence (AI) and machine learning products, as well as a new managed services offering. This allows customers to offload the boring, mundane tasks such as updating software, patching systems and similar IT chores. Believe or not, using a data center doesn’t get you access to these sorts of tasks. Companies still need to do it themselves.
This is a huge differentiating point for AMZN vs. cloud rivals such as Microsoft Corporation (NASDAQ:MSFT). More importantly, these services have been designed with Amazon’s overall mantra in mind: save customers money. Businesses can fire their entire IT staff and save bundles by switching to AMZN’s services.
Heck, Amazon will even drive over a 100-petabyte mobile hard drive to help corporate clients upload their data to AMZN’s cloud.
All of these efforts seem to be working to attract corporate clients. Amazon’s case studies include Kellogg Company (NYSE:K) using AMZN’s data analytics to improve commodity trading, and drug maker Pfizer Inc. (NYSE:PFE) improving its R&D to more efficiently answer consumer questions.
The Big Win for AMZN Stock
It’s clear that retail operations still run the show at AMZN, but the new AWS division is what’s really driving growth. As it is able to plug more big corporate clients into its system, the potential at Amazon is huge.
Right now, AWS accounts for less than 10% of Amazon’s revenue. Shopping still rules the roost. But, margins at AWS are crazily high as, once it’s in place, Amazon doesn’t have to do much. As a result, last quarter, the company’s cloud services division contributed roughly 75% of overall profit.
If Amazon is able boost revenue from the sector — and it should because SaaS applications and web-hosting is a fee based business, not a one-time sale — profits from AWS should continue to soar. In the end, cloud computing could be the real driver for AMZN stock, and retail sales might eventually become the side business.
For investors looking at AMZN stock today, its future continues to be tied to cloud computing. Don’t think of Amazon as merely a play on e-commerce.
The Bottom Line
It’s no secret that Amazon is a monster retailer. But, what will really drive AMZN stock over the long term is its cloud computing division. Margins and profits here are what dot-com dreams are made of. At the end of the day, Amazon’s future will be all about the cloud.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.