Most people (and many investors) still think of Amazon (AMZN 0.37%) as an e-commerce business because Amazon has become so ubiquitous with consumers. But what they may not be as aware of is that Amazon Web Services (AWS) has been the company's spark plug since 2006, generating cash to fund e-commerce and other projects, becoming Amazon's most profitable segment.
One person who does know is Amazon's head of AWS, Adam Selipsky. In a recent interview, he pointed out that there is a massive opportunity still ahead of AWS and that it can become a much bigger part of the company overall. Here is what investors need to know about what Selipsky had to say.
It's still "Day 1" for AWS
Amazon Web Services is a cloud platform, a collection of hardware and software that offers computing services like storage, servers, and networking for Amazon to use and for other enterprises to rent on a metered billing model that generates plenty of recurring revenue.AWS' clients can remotely access its services, removing the need to invest in setting up or maintaining a physical computing system. It's all done over the internet, so companies don't need to use servers or other equipment.
AWS' success at offering this service has made it the leading cloud platform in the world; Statista estimates the cloud platform industry today is worth $180 billion globally, and AWS controls an estimated 33% of the market.
While discussing AWS' opportunity last week in a CNBC interview, Selipsky noted that roughly 10% of the world's IT has migrated to the cloud, which means that AWS is still operating as though it is "Day 1" for this segment of the company and most of its growth is yet to come. That Day 1 reference is related to a philosophy former CEO Jeff Bezos advocated that involves maintaining a start-up mentality that fights challenges, embraces change, and employs quick decision-making.
AWS is where the profits are at
Growing AWS could be the best business outcome possible for investors because it's Amazon's most profitable business by a country mile. The e-commerce business might generate a ton of revenue, but it's price competitive and requires spending on logistics and labor costs to support it.
Amazon overall generated $24.8 billion in operating profits in 2021, and AWS was responsible for $18.5 billion (or 74%) of it. Basically, a business segment that contributes 14% of overall revenue is generating roughly three-quarters of Amazon's total operating profits.
AWS revenue totaled $62 billion in 2021, a 37% increase over 2020. Even if AWS grows by just 25% over the next three years, AWS will double its size. It would remain a minority of Amazon's business at $124 billion in annual revenue. However, assuming margins stayed the same, Amazon's total operating profits would grow 48% by year three, from $25 billion to $37 billion. AWS is so profitable that it can move Amazon's bottom line despite its small size, and this will have more impact as AWS becomes a larger contributor.
AWS growing and contributing more to the company should only help fund more investments to expand Amazon's emerging side businesses, including digital ads and content.
What might drive AWS' growth
Amazon's done $478 billion in total revenue over the past four quarters, on a seemingly inevitable path to reaching $1 trillion in annual revenue at some point. From a sales standpoint, AWS is still small in Amazon's grand scheme, contributing just 14% of revenue. Selipsky thinks that will steadily change.
The segment chief is likely right. Grand View Research estimates cloud computing is a $484 billion business worldwide, which could grow to $1.5 trillion by 2030. A tripling of the market by 2030 could easily mean a tripling for AWS as well. AWS could leverage its cloud platform leadership and expand its offerings to capture market share in other niches within cloud computing. It already offers more than 200 services today.
Priorities and circumstances can always change, but the odds are good that Amazon's $67 billion in annual AWS revenue has room to grow through 2030 and potentially far beyond that. That makes the stock worthy of adding to one's portfolio.