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Amazon Stock Will Survive as Target Takes Business Elsewhere

Luke Lango

Amazon.com, Inc. (NASDAQ:AMZN) stock won’t see any long term damage from the announcement that Target Corporation (NYSE:TGT) is cutting back on some Amazon services. The global e-commerce giant has reshaped yesterday’s retail world and created a new one that has left many traditional brick-and-mortar retailers in difficult situations. Meanwhile, Amazon has turned around and converted many of those troubled retailers into customers for their cloud-hosted services, Amazon Web Services (or AWS). 

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Source: Grab Media

It is a weird cycle to think about. Because AWS is the biggest contributor to Amazon’s operating profits, retailers paying for AWS are in some ways subsidizing Amazon’s marginally profitable retail business. That marginally profitable retail business is the culprit for many of the problems in retail today.

If you find that “pay-the-same-person-who-is-stealing-your-sales” dynamic weird, you aren’t alone.

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Target found it weird, too. Target is a big AWS customer. But the discount retailer is going to scale back its use of Amazon Web Services significantly according to CNBC:

“According to one source, Target is planning to aggressively move e-commerce activities, mobile development and operations away from AWS through the end of the year and probably into 2018.”

Its a big move, but what does it mean for Amazon stock? It has already fallen from the $1,050 level to the $950 level, but is there trouble ahead?

Not really. Here’s why.

Amazon Web Services Is Really Big

Amazon Web Services is really, really big. Indeed, its too big for a few retail companies weaning off the service to do much of anything to the numbers.

Amazon Web Services reported $4.1 billion in net sales last quarter. That is a pretty big number. It’s so big for the cloud services space that its hard to imagine any one company (or even collection of companies) comprising a significant piece of that pie.

To put in perspective the entire cloud infrastructure market was an $11 billion revenue market last quarter, according to Synergy Research Group. That means Amazon Web Services controls more than a third of the market. And no other cloud service provider is even close to AWS in terms of size. According to Synergy, AWS is three times the size of its nearest competitor.

So, yes, Target has had enough. The discount retailer is tired of financing its biggest competitor. The Whole Foods Market, Inc. (NASDAQ:WFM) acquisition likely was the final straw.

It is possible some of Big Retail will likely follow in Target’s footsteps and shift increasingly towards other cloud service providers, like Microsoft Corporation (NASDAQ:MSFT) or Alphabet Inc (NASDAQ:GOOGL). Current big retail names that are AWS customers include Nordstrom, Inc. (NYSE:JWN), Under Armour Inc (NYSE:UAA), and Lululemon Athletica inc. (NASDAQ:LULU).

Those guys very likely could pull the plug on AWS.

But Amazon also counts a bunch of non-Big Retail companies as its AWS customers. That list is much more robust, and it includes McDonald’s Corporation (NYSE:MCD), Adobe Systems Incorporated (NASDAQ:ADBE), Comcast Corporation (NASDAQ:CMCSA), Twilio Inc (NYSE:TWLO), Yelp Inc (NYSE:YELP), Netflix, Inc. (NASDAQ:NFLX), Johnson & Johnson (NYSE:JNJ), and General Electric Company (NYSE:GE), among many, many others.

Those guys aren’t going to pull the plug on AWS any time soon.

Amazon Stock: The Bottom Line

Despite some troubles ahead with Big Retail names, AWS will continue to grow nicely over the next several years. It is the leading player in a market that is still growing over 40% year-over-ear.

That is big for AMZN stock, because AWS is the profit driver of the whole well-oiled Amazon machine. The more scale AWS reaches, the longer Amazon can run its retail operations on razor-thin margins. The longer Amazon can run its retail operations on razor-thin margins, the more market share the e-commerce giant will grab.

Its a winning cycle that will benefit AMZN shareholders the most.

As of this writing, Luke Lango was long AMZN, MCD, NFLX, TWLO, LULU, and TGT.

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