Yesterday, Amazon.com, Inc.’s (NASDAQ:AMZN) vice president of cloud architecture strategy, Adrian Cockcroft, gave a presentation at a tech conference. Of course, he extolled the virtues of his company’s cloud platform, called AWS (Amazon Web Services). Meanwhile, the service was experiencing a major outage.
Granted, the impact on Amazon stock was fairly minor. Yet, investors should still be concerned. Let’s face it, AWS is critical for AMZN stock.
Last year, this business segment reported a 56% spike in revenues to $12.2 billion and operating income came to $3.1 billion. There are over 1 million active customers. More importantly, Amazon Web Services essentially subsidizes the core ecommerce business — which has razor-thin margins — but also allows for the heavy investments in efforts like video/music streaming, Alexa and devices like the Kindle.
As for the AWS outage, it lasted roughly four hours and resulted in the disruption of thousands of websites and cloud apps across the US. Some of the high-profile companies that were impacted included Apple Inc. (NASDAQ:AAPL), Twitter Inc (NYSE:TWTR) and Twilio Inc (NYSE:TWLO).
At the heart of this was the failure of the S3 system, which provides for the efficient storage of content. The irony is that AMZN could not even access its own dashboard to deal with the problems – since it was also hosted on the AWS platform!
The Real Impact?
It is important to keep the outage in perspective. For the most part, Amazon Web Services has a great track record, with uptime that is over 99%. As a result, whenever there is a major outage, there is quite a bit of buzz.
Besides, AWS is a standout offering. Over the years, AMZN has added great features — such as for data analytics, AI (artificial intelligence) and improved security functions — and has also been diligent with lowering pricing. Yet, this does not mean the outage is trivial. It’s reasonable to assume that there are many companies that are evaluating the situation. After all, should there be more usage of alternative systems?
Well, I think so. Note that other internet giants are leveraging their own systems to provide cloud services, as seen with Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG). Google is even the main vendor for the fast-growing Snap Inc (NYSE:SNAP), which has signed a $2 billion contract.
Oh, and many old-line tech operators have been investing heavily in their cloud systems. Just some include International Business Machines Corp. (NYSE:IBM), Oracle Corporation (NYSE:ORCL), Hewlett Packard Enterprise Co (NYSE:HPE) and Microsoft Corporation (NASDAQ:MSFT). All these companies have key advantages like trusted brands, global infrastructures and massive customer bases.
Interestingly enough, these companies also have something else: They provide hybrid solutions, such as a blend of cloud services and on-premise technologies. This means a customer can place their mission-critical systems on private servers, which would mean no disruption if there was an outage of AWS.
Bottom Line for AMZN Stock
OK then, with the outage of AWS, there should still not necessarily panic. The market opportunity for the cloud is massive — with plenty of room for multiple players. What’s more, the financial costs for the outage will probably be immaterial. According to Global Equities’ Trip Chowdhry, he thinks that there could be a 2% drop in revenues for the first quarter.
If there are a couple more outages, however, then the situation could get dicey. When it comes to cloud hosting, there aren’t too many second chances.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is the author of various books, including Taxes 2017: Saving A Bundle. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
