Amazon.com Inc.

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The Catastrophic Risk to Amazon's Cloud Business and Stock Price



Fundamentals

Written by Ophir Gottlieb

PREFACE
Amazon.com Inc. (NASDAQ:AMZN) has now over taken Facebook as the fourth largest technology company in the world behind Apple, Alphabet Inc. (NASDAQ:GOOGL) and Microsoft. Revenue is ripping higher even at a scale of over $100 billion a year. The cloud business has pushed operating margins, earnings and free cash flow are each to all-time highs.

Everything the company tries is working, and it's working better than even the most bullish analysts have forecast. But there's a massive risk looming that impacts more than 50% of Amazon.com, Inc.'s operating profits.


AMAZON.COM, INC.
The headlines have read that Amazon.com crushed revenue and EPS estimates in its latest earnings release, and that's true. The headlines further read that the cloud business, Amazon Web Services (AWS) drove more than 50% of operating profit although it produced just 9% of revenue. That's a high margin business, to say the least.

We go further with the headlines and we read that the AWS business segment grew revenue by 64% year-over-year and it continues to dominate the competitive landscape:

CLOUD INFRASTRUCTURE MARKET


Amazon is crushing it -- even Microsoft has yet to crack 10% penetration. But, here's where the massive risk lies, and there is just no way to overlook it. Let's start simple and look at AWS revenue per quarter in all-time from our friends at Statista:



It looks pretty good, but then we do a little analysis and realize, there's a massive risk to its cloud business, here. In this next chart we simply put each quarter of revenue growth from AWS side-by-side with its corresponding quarter from the prior year.



That trend line is a regression line. We can see that down trend, and more specifically, Q1 growth year-over-year dipped from 10% to 7%.

No matter how profitable the cloud business is, growth is slowing rapidly. If the cloud is the growth engine for Amazon.com, Inc. (NASDAQ:AMZN) that has turned it into a $350 billion company, then it's time to focus on the massive risk -- rapidly declining growth in a business that really is not that big.

ALPHABET INC. (NASDAQ:GOOGL)
Of all the company's involved, Alphabet Inc. (NASDAQ:GOOGL) may be the most focused on innovating the cloud. We know that Google just took a $500 million chunk of Apple's iCloud business away from the two leaders, Amazon and Microsoft.

But Google has recently opened declared its commitment to taking the cloud business lead with its competitive advantage being, simply, greater innovation. Alphabet Inc. has placed its cloud data centers on water to create a source of cooling and power. Alphabet Inc. has a patent for the project. Here's a rendering from the U.S. Patent and Trademark Office:

ALPHABET INC. CLOUD PATENT IMAGE


Alphabet Inc. is innovating faster than any other company when it comes to artificial intelligence, which is also a major focal point of its cloud. Apple's $500 million imprimatur doesn't hurt. In sum, it points to yet another massive risk to Amazon.com, which relies on the cloud business for more than half of its profits.

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Thanks for reading, friends.