Amazon's (AMZN -2.56%) share price tanked after the company reported earnings last month, on news that the growth rate of Amazon Web Service (AWS), the company's cloud business, has continued to decline. AWS is crucial for Amazon because of its growth potential, and it also helps Amazon stay out of the red.
AWS has been growing in size and importance for Amazon
Amazon's business is diverse, and the bulk of its top line still comes from online retail. But AWS has been taking up a bigger chunk over the years. At $21.4 billion in revenue last quarter (period ended March 31), it was 42% the size of online retail sales. Two years ago, that percentage was just 26%, when AWS sales were much smaller at $13.5 billion.
Data source: Company filings. Chart by author.
Alarm bells went off last quarter when Amazon reported that AWS' growth rate was continuing to slow down. But even at 16% revenue growth, it remains one of the company's fastest-growing segments:
Data source: Company filings. Chart by author.
AWS plays a key role in the company's growth, which is why there may have seemed to be an overreaction to the recent quarterly results. But the truth is that because of AWS' importance and the growth it has generated for Amazon in the past, how this division performs gets a lot of attention. And AWS' performance can have a significant impact on the bottom line as well.
Without AWS, Amazon wouldn't be profitable
Amazon's profit margins are fairly low, often in the single-digit percentages. The company breaks out its operating income by North America (NA), International (INTL), and AWS. And while the geographical breakdowns include many segments, they aren't enough to make them profitable.
As you can see from the chart, AWS has been picking up the slack and helping the business stay in the black:
Source: Company filings. Chart by author.
Amazon normally doesn't report a loss, but when it does, it can make big news and send the stock reeling. Keeping AWS strong could be key in ensuring that the business remains profitable.
Is Amazon stock a buy despite slowing AWS growth?
A decline in AWS growth is concerning, but it's not a huge problem, given the context. Companies are scaling back their investments in preparation for a potential recession this year, so there's incentive for businesses to tighten their belts and curb spending.
Those aren't trends that will last, however, as more business is being done online these days and the excitement surrounding artificial intelligence is only going to result in more of a need for cloud-based computing, not less. There's no need to panic over the drop in AWS' growth rate, but investors should recognize the important part it plays in Amazon's business.
Although Amazon's stock looks obscenely expensive, trading at 250 times its trailing earnings, the company is in the midst of laying off staff, cutting costs, and strengthening its bottom line. Its profitability should improve, and buying the tech stock now, while it's down close to 30% from its high, could be a great move for long-term investors.
