1 Bright Spot Makes Amazon.com a Buy

Amazon (NASDAQ: AMZN  ) shares haven't been below $300 since October of last year, but on Monday, shares fell below the critical point as investors all of a sudden cared about costs. Yet, while analysts continue to poke holes in the company's quarterly report, one segment in particular, and its dominance over peers Salesforce.com (NYSE: CRM  ) , Google (NASDAQ: GOOG  ) , and Microsoft (NASDAQ: MSFT  ) might make it a buying opportunity.

The battle for cloud
Never mind Amazon's growing e-commerce business -- 94% of its business -- or its 23% overall revenue growth. Instead, let's focus on the other 6% of Amazon, a segment called Amazon Web Services, or AWS, a fast-growing business valued at $50 billion, or 37% of Amazon as a whole.

AWS is an undisputed leader in cloud infrastructure, or laaS, and a growing threat in app platforms, or PaaS. According to Synergy Research, AWS grew 55% in the second half of 2013, while the $2.5 billion overall laaS/PaaS market grew 46%. Below you can see Amazon's dominance in market share as of the third quarter of last year. Keep in mind, Amazon's growth exceeded the overall market's performance in the fourth quarter as well.

 

laaS market share

laaS Q3 revenue

PaaS market share

PaaS Q3 revenue

Amazon

35%

$560 million

17%

$153 million

Salesforce.com

3%

$48 million

18%

$162 million

Microsoft

3%

$48 million

14%

$123 million

Google

3%

$48 million

13%

$117 million

What makes Amazon's position remarkable is the desperation that its peers have shown to gain market share in recent months -- except Salesforce.com, that is.

Apparently, Salesforce.com is comfortable with its 18% share in the PaaS market, and hasn't shown a strong sense of urgency to cut prices significantly. Instead, it has launched Salesforce1, which places a strong emphasis on mobile optimization to remain competitive and maintain market share in PaaS.

In many ways, it highlights the company's strategy: Offer more products regularly to gain market share. The problem for Salesforce.com is that it's the only company that relies solely on its cloud business to stay in business, as each of the other noted competitors have other core segments.

Microsoft's new CEO has talked regularly about the company's new identity and becoming cloud-oriented. Currently, Microsoft's share of laaS is similar to Salesforce.com and Google, while its Azure is competitive in PaaS. It's worth noting that Microsoft has also grown Azure by adding new features, and it recently said that 57% of Fortune 500 companies use the platform.

For Google, it is trying the approach of cutting prices to gain market share. It recently announced 30% and 68%-85% price cuts in laaS and PaaS, respectively.

AWS reigns superior
Only Salesforce.com is highly reliant on this space to support top and bottom lines, and the company's valuation. In retrospect, laaS and PaaS are pennies relative to the size of the overall businesses at Amazon, Microsoft, and Google. However, each company has made strides to become competitive in both pricing and service, with actions that paint the cloud as an important segment to each company's future.

With that said, Google, Salesforce.com, Microsoft, and Amazon have all made large investments in the cloud because of both its growth and its overall potential to become a substantial segment to each company's top and bottom line. laaS/Paas could become a significant piece of each company's fundamentals in the next five years. For this reason, investors should really like Amazon following such significant stock losses.

Specifically, in light of product updates from all of its competitors and lower prices, AWS still managed to grow 60%, year over year, in the first quarter, which represented an acceleration from its 52% clip in the fourth quarter. Not to mention, AWS's growth was also largely responsible for a 230 basis-point increase to the gross margin in the quarter. Therefore, Amazon's ability to grow this segment rapidly means that it's quickly becoming fundamentally relevant to the company, which is a goal that all of its competitors hope to accomplish.

Final thoughts
Amazon has lost nearly one-third of its valuation, now having a market cap of $135 billion. In the fourth quarter, Evercore estimated AWS's value at $50 billion, but with accelerated growth amid increased competition, it's clear that the platform is as good as advertised.

Therefore, as AWS's growth continues to outpace its core e-commerce business, the segment will reflect as a larger piece of the company's market capitalization. Until then, Amazon trades with a valuation of just $85 billion minus AWS, or just more than one times sales.

For a company that's expected to grow 20% annually the next two years, one times sales isn't expensive, nor is it expensive for a company with a fast-growing multi-billion-dollar cloud business that's crushing the competition. Essentially, AWS lowers the risk associated with Amazon's e-commerce business, and it makes Amazon that much more attractive following large losses.

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