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Amazon Surprises Investors as AWS Hits $5B in 2014 Sales - Analyst Blog

Zacks Equity Research

Amazon AMZN, for the first time, has disclosed the financials of its cloud computing business — Amazon Web Services (AWS).

To everyone’s surprise, AWS’ sales hit $1.6 billion in the first quarter of 2015, up 49% year over year. This accounted for 7% of Amazon’s total first-quarter sales. Also, AWS’ operating profit was $265 million in the quarter, up 7.5% year over year. Operating profit margin came in at 16.9%, which was quite impressive considering Amazon usually posts slim margins or even losses.

For 2014, AWS generated revenues of $5.16 billion. Amazon also stated that it had $6.9 billion in assets tied up in AWS at the end of 2014. Following the solid AWS financial details, the shares surged 6.8% in after-hours trading.

A Little Background

AWS is in the business of providing computing infrastructure like a utility so companies don’t need to maintain their own IT infrastructure. It facilitates the movement that we have come to know as cloud computing. Direct benefits for companies taking to the cloud include cost containment, scaling and faster time to market.

However, enterprises do not usually move to the cloud at one go and may require a hybrid structure, i.e., rely partly on cloud and partly (the confidential part) on their own infrastructure that may be maintained by a cloud provider. This has led to public, private and hybrid clouds.

Intense Competition

Amazon definitely enjoys a first mover advantage so far mainly because it was quick to identify the trend. The AWS business currently leads the cloud infrastructure market, ahead of Google GOOGL, Microsoft MSFT, IBM Corp. IBM, VMware, and many others. According to Gartner’s 2014 report, AWS had five times more computing capacity than its competitors.

However, the speed at which businesses are moving to the cloud and the amount of innovation in the space is putting pressure on Amazon’s resources. The online retail giant runs every business at rock-bottom prices, but it is hard to undercut Microsoft and Google on prices since both have very deep pockets and lucrative business models that yield high margins and billions in cash flow.

Our Take

AWS is the biggest public cloud in the market. Despite the increasing competition, we remain positive about its growth prospects. Amazon’s continuous efforts to launch new AWS features, open more data centers globally and constantly lowering prices of several of its services will always give it a competitive advantage.

Currently, Amazon carries a Zacks Rank #3 (Hold).


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