Amazon Web Services Is No

Amazon Web Services and are both involved in "cloud computing," but other than that, they're nothing alike.

Mar 30, 2014 at 1:00PM

While there is a wide range of opinions on the long-term ceiling for's (NASDAQ:AMZN) retail business, the company's cloud-computing arm is an even bigger wildcard. Amazon Web Services allows other companies to rent computing power from Amazon rather than buying and operating their own servers.

This business has been growing very rapidly. Last year, revenue in Amazon's "other" segment in North America -- which primarily consists of AWS sales -- reached $3.7 billion: up from less than $1 billion in 2010. The rapid growth of Amazon Web Services has led some analysts to value this oft-overlooked part of Amazon's business at $50 billion or more.

To justify these estimates, analysts typically point to other "cloud-computing" companies like (NYSE:CRM), which has a $34 billion market cap despite generating just over $4 billion in revenue last year. But Amazon Web Services is nothing like Salesforce. It is a much more capital-intensive business than Salesforce and has minimal pricing power.

Another round of price cuts
Amazon Web Services (like Salesforce) is the clear leader in its field. In fact, AWS dominates the "infrastructure-as-a-service" market. According to Gartner (NYSE:IT) it is more than five times the size of the next 14 competitors combined! Normally, this kind of market share lead should translate to significant pricing power.

But AWS is under pressure -- or at least feels under pressure -- from various Big Tech firms that are trying to break into this market, including Google (NASDAQ:GOOGL) and Microsoft (NASDAQ:MSFT). Neither company's IaaS offerings are close to AWS in market share, but Google and Microsoft both have unique competitive advantages in cloud computing. Google has its popular Google Drive service, various productivity apps, and Compute Engine, while Microsoft has its Office 365 cloud-based productivity suite as well as Azure.

In any case, Amazon has been ultrasensitive to the prospect of being underpriced by other IaaS providers. Since Google launched its AWS competitor in 2012, the two companies have periodically engaged in price-cutting battles.

This past week, Google cut its "App Engine" prices yet again. It didn't take long for Amazon to shoot back with price cuts of its own that range from 36%-65%, effective April 1. AWS senior vice president Andy Jassy made light of the price cuts, noting that AWS has reduced prices 42 times in its relatively brief history.

Jassy is essentially trying to make a virtue of a clear weakness. If AWS needs to respond in kind to every competitor's price cuts, it will have two negative impacts on the business. First, it will cause revenue growth to slow dramatically -- if prices fall 50%, AWS would need to double its volume just to keep revenue flat. Second, it will ensure that AWS remains a perpetually low-margin business.

A black hole of CapEx
The commoditized nature of Amazon's product stands in stark contrast to Salesforce's business. But an even bigger difference between the two companies is the capital intensity of their respective businesses.

Unlike AWS, which primarily sells infrastructure as a service, Salesforce offers software as a service. While Salesforce has to devote a significant amount of money to R&D -- over $600 million last year -- the vast majority of its costs relate to selling, general, and administrative expenses.

SG&A has been rising rapidly recently, but over time Salesforce should be able to leverage those expenses significantly. This potential for margin growth can justify Salesforce's high valuation even though it has consistently lost money on a GAAP basis and has a narrow profit margin on a non-GAAP basis (which excludes acquisition-related costs and stock compensation costs).

By contrast, as AWS grows, it needs more and more computing power and storage to rent out to its clients. This has driven a massive jump in Amazon's capital expenditures recently. From 2005 to 2009, Amazon's annual CapEx rose from $204 million to $373 million, which was significantly slower than the rate of revenue growth.

By 2013, CapEx had skyrocketed to $3.44 billion: up nine-fold in just four years. Some of that growth is related to new distribution centers for the retail business, but a large portion can be attributed to AWS.

For Salesforce, strong revenue growth brings the promise of margin expansion as the marginal cost of adding customers is fairly low. That's not true for Amazon Web Services. As it gains more business, it must plow billions and billions of dollars into things like servers, storage, and networking gear to support that growth.

Foolish bottom line
Amazon Web Services should be a solid contributor to Amazon's overall business in the long run. But just because it's involved in "cloud computing" doesn't make it similar to companies like Salesforce.

Despite its dominant market share, AWS competes tooth and nail with competitors like Google and Microsoft. Moreover, it needs to spend an ever-increasing amount on adding computing power in order to support its growth. This makes it a fundamentally low-margin, weak-cash-flow business: not one worth a gaudy multiple like Salesforce.

The biggest thing to come out of Silicon Valley in years
If you thought the iPod, the iPhone, and the iPad were amazing, just wait until you see this. One hundred of Apple's top engineers are busy building one in a secret lab. And an ABI Research report predicts 485 million of them could be sold over the next decade. But you can invest in it right now... for just a fraction of the price of AAPL stock. Click here to get the full story in this eye-opening new report.

Adam Levine-Weinberg is short shares of The Motley Fool recommends, Gartner, Google, and The Motley Fool owns shares of, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers