What Amazon just said could mean billions more in growth
Share price of Amazon (AMZN 2.19%) are up 22% over the last month. The company’s second-quarter earnings report showed retail struggling to return to pre-pandemic growth levels, while Amazon Web Services’ (AWS) cloud business saw an uptick. strong 33% revenue growth over last year’s quarter, and it’s not done yet. .
On the earnings call, Chief Financial Officer Brian Olsavsky said, “AWS continues to grow at a rapid pace, and we believe we are still in the early stages of enterprise and public sector cloud adoption. “.
AWS accounts for 13% of Amazon‘s total revenue, but has become the company’s most important growth engine. As this further contributes to Amazon’s bottom line, Redburn analyst Alex Haissl estimates that AWS’ long-term value could be worth double Amazon’s current market capitalization of $1. 4 trillion dollars.
Although no timeline was given as to when AWS might reach a valuation of $3 trillion, there is good reason to believe that Haissl is correct.
AWS generates constant growth
AWS’ growth in the second quarter represented a deceleration from the 37% year-over-year increase in the prior quarter. However, Amazon believes AWS will continue to perform well in a weak economic environment.
AWS has been a very consistent performer. The segment saw a 34% increase in revenue in Q4 2019, before decelerating slightly to 33% in Q1 2020. That was over two years ago, and AWS continues to grow in line with that trajectory.
The consistent rate of growth is rooted in the value AWS brings to organizations. This frees up capital to invest more in product development so companies can focus on their unique offerings instead of building new data centers, which ties up billions of dollars. This is the core value that cloud computing brings to a business.
Amazon is riding a wave of tech infrastructure spending in the wake of the pandemic. Companies that invest in cloud services do not care about the state of the economy because these are long-term investments that are crucial to their competitiveness for decades to come.
How big is the cloud market?
The trail of cloud growth could stretch for years. Government is one industry that is beginning to increase its investment in cloud services. Total federal cloud spending has more than doubled over the past five years to $8.1 billion through August 2021, according to Deloitte Insights, and continues to grow in 2022.
In addition to governments and nonprofits adopting AWS, Amazon also reported signing new agreements with existing customers during the quarter, including Delta Airlinesvideo game maker Riot Games, and Jefferies Financial Group.
Global spending on public cloud services is expected to reach $482 billion, according to Gartnerup from $145 billion in 2017. By 2023, the market for public cloud services is expected to reach nearly $600 billion.
Amazon gained a point of market share in the second quarter, according to Synergy Research, and continues to hold a large lead over its competitors Microsoft and Alphabet.
AWS could generate $288 billion in annual revenue in 10 years, which assumes an annualized growth rate of 15%. Based on AWS’s current operating margin, the segment would generate $88 billion in operating profit, or earnings before interest and taxes (EBIT). A valuation of $3 trillion would imply an enterprise value to EBIT ratio of 34, which is not unusual for a high-growth, high-margin company.
It’s possible that AWS could grow faster than 15% per year, which would make it easier to justify a future value of $3 trillion. Either way, Redburn analyst Alex Haissl’s estimate seems reasonable on its face, and it’s enough to suggest that Amazon shares offer attractive value at current price levels.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. John Ballard holds positions at Amazon. The Motley Fool owns and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Jefferies Financial Group Inc. and Microsoft. The Motley Fool recommends Delta Air Lines and Gartner. The Motley Fool has a disclosure policy.