Amazon's Cloud Is Locked And Loaded

Amazon.com (Nasdaq: AMZN  ) has its head in the clouds. The online retailer is a pioneer in cloud computing, thanks to a willingness to extend the IT infrastructure that powers its own sites and services into a rent-by-the-hour computing service of its own. And now the time has come to lock customers into long-term contracts. This could be the beginning of a beautiful growth story.

A $0.10-per-hour charge for using Amazon's smallest Elastic Computing Cloud (EC2) platform with a Red Hat (NYSE: RHT  ) Linux operating system adds up to about $876 per year. Move to the beefiest instance, with many times the memory, processing power, and storage space and a Microsoft (Nasdaq: MSFT  ) Windows environment, and you're looking at $10,512 a year per virtual machine.

But a new pricing plan locks customers into a one-year or three-year contract, with base fees ranging from $325 to $2,600 for one year, or $500 to $4,000 for three years. In exchange for that commitment, the customer gets a much lower hourly rate. Running the smallest machine 24/7/365 as a reserved instance adds up to $588 under a one-year contract, or $3,435 for a souped-up battleship under a three-year deal. Then there's a bit extra for data transfer, extra storage, and whatnot. Still, slashing virtual hardware costs by two-thirds is a significant price drop.

These virtual machines on Amazon's robust infrastructure can run any service you like, and they already power dozens of business-class applications. Autodesk (Nasdaq: ADSK  ) , Washington Post (NYSE: WPO  ) , and the Harvard Medical School are just a few of EC2's customers -- and all of them can save a good chunk of change by moving to this new pricing plan. That's how you attract more corporate customers and ensure that they won't jump to some competitor's service when the mood strikes.

And there's plenty of new ground to break here. Hotshot messaging service Twitter already hosts its images on EC2's sister act, the Simple Storage Service. As Twitter grows -- and boy, is it ever growing! -- it could make sense to move the whole shebang into Amazon's cloud-computing servers. That's just one of many examples of Amazon's growth potential in the virtual computing space.

And now, your concluding moment of techno-irony: Although Amazon can thank VMware (NYSE: VMW  ) for getting the world accustomed to virtual machines in the first place, EC2 actually runs Citrix Systems' (Nasdaq: CTXS  ) XenSource virtualization software.

Further Foolishness:

Microsoft is a Motley Fool Inside Value recommendation, VMware is a Motley Fool Rule Breakers pick, and Amazon.com is a Motley Fool Stock Advisor selection. The Fool owns shares of Autodesk. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. He does have an EC2 account, his own Linux server, and a Ph.D. in geekdom and nerdery. You can check out Anders' holdings or a concise bio if you like, and The Motley Fool is investors writing for investors.


Read/Post Comments (3) | Recommend This Article (4)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 16, 2009, at 4:49 PM, imalost wrote:

    You guys need to hype Amazon everyday. Do you ever discuss any real issues ? How much cloud computing will add to the bottom line or the fact that this stock sells for a bloated PE of 46 and ten times book. Realistically Amazon has stiff competition in cloud computing. This stock is way overvalued cloud or no cloud computing. Please put out an article discussing how Amazon guided down profits as much as 37% this quarter or discuss and compare some real metrics like PE, PEG and book value. You always seem to distort to the positive side to this stock and make believe the downside or negative don't exist. With a PE in nosebleed levels how much upside can there be ? You seriously think that investors will pay a PE of 60 or 70 for a company with zero to negative growth in 2009?

  • Report this Comment On March 16, 2009, at 5:28 PM, imalost wrote:

    Instead of saying that Amazon has its head in the clouds. You should say Amazon stock is in the clouds like like a helium filled balloon.

  • Report this Comment On March 25, 2009, at 12:50 PM, htownjester wrote:

    imalost- spend 10 minutes investing based solely on quants like PE, PEG and book value and let me know how far that gets you. Anyone can run a stock screen based on quants- that is only one aspect to investing. There are others you should consider like: 1) business model; 2) management; 3) "moat" or how definsible the model; 4) long term growth prospects; 5) hidden assets / special situations; 6) disruptive technologies.

    I will admit at first blush PE, PEG and profit for 2009 don't look stellar (if your numbers are right and not just a parroting of bad news headlines with no substantive analysis behind them). But I do not base very much of my decision to invest on these, again it is only part of the picture. This is even more the case when investing in growth and technology companies, whose P/E is not in a "normal range" because there is future growth priced into the share value. It also does not matter one bit for any company having experienced significant one time accounting gains or losses based on impairments or other significant changes in the business, as just an example of other situations where P/E is silly (I have seen PE of 40+ for insurance company valued at book, that has 20 year history of 20% compound annual growth in book. It is called Markel an happens to be an outstanding investment right now).

    I would recommend you take up some reading on investing before bashing. Start with One up on Wall Street, Beating the Street, It's Earnings That Count (does not necessarily support your arguments above BTW), The Innovator's Dilemma (especially useful in evaluting Cloud Computing and other disruptive technologies) and consult the Fool's reading lists for more. Of course anything by or about Buffett is fundamental and should be included. Give that sort of education at least 2 years to marinate and then, at a minimum, your bashing skills will improve and you will be able to tear apart an investment idea by looking at more than just GAAP earnings and the ratios derived from this (often distorting) number.

    Cheers,

    Jesse

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