In the third quarter of 2023 (ended Sept. 30), Amazon (AMZN 0.79%) generated revenue of $143 billion. The vast majority of this, about $92 billion, was derived from online stores and third-party seller services, which are directly related to the company's insanely successful digital marketplace.
It has long been the case that Amazon's e-commerce operations were the bread and butter of the business. After all, the company was founded with the goal of selling books online, which eventually turned into consumers being able to buy just about anything they wanted from the comfort of their homes.
With so many billions in e-commerce revenue, investors may be surprised to learn that this tech titan generated 62% of its Q3 operating income from an entirely different segment. Here's what you need to know.
The cloud is where the real profit lies
Generating over $23 billion in sales last quarter, Amazon Web Services (AWS) provides businesses and governments with various tech infrastructure services, like computing power, storage capacity, and database management. Compared to investing in IT tools on-site, these cloud computing customers benefit from lower costs and from having the flexibility to adjust their needs up or down at any time. This frees up capital that would otherwise be tied up in long-term projects.
AWS, whose clients include Walt Disney, Verizon Communications, and Capital One, is tiny (as measured by revenue) when compared to the company overall. But its profitability is notable. The segment posted a stellar 30% operating margin in Q3, generating $7 billion in Q3 operating income. For comparison's sake, Amazon as a whole reported $11.2 billion in operating income last quarter.
This outsized profitability demonstrates the monster potential of AWS. It has long dominated the industry, with about one-third of the global market share. As it continues scaling up, it's easy to believe that margins will keep expanding. In the first quarter of 2015, AWS registered an operating margin of 17%, so it has improved over time.
But it was discouraging to see AWS' chief rivals, Microsoft Azure and Alphabet's Google Cloud, posting much faster revenue growth in the latest quarter. Of course, they are starting from a smaller sales base, but this is not a good trend.
CEO Andy Jassy doesn't seem worried. "We're seeing the pace and volume of closed deals pick up, and we're encouraged by the strong last couple of months of new deals signed," he said optimistically on the Q3 2023 earnings call.
And zooming out, there is a ton of growth to be achieved. Grand View Research estimates that by 2030, the global market for cloud infrastructure services will be worth a whopping $1.6 trillion in annual revenue, rising at about 14% per year until then. As the clear leader in the industry, AWS is in a prime position to benefit from this trend.
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Key Data Points
Don't forget about Amazon's other segments
While AWS is certainly a major growth and profitability driver for Amazon, investors shouldn't completely ignore other divisions that are critical to the operations as well.
It's hard to envision a scenario where the online marketplace doesn't remain the focal point for the business for the foreseeable future. Management has made huge investments to bolster the company's logistics footprint to better serve customers, and this will continue to provide benefits when drawing in shoppers looking for low prices and fast shipping.
The popularity of Amazon.com has spawned another booming revenue source. Most investors might not know that Amazon currently produces the third-most digital advertising revenue in the world, behind only Alphabet and Meta Platforms. This is just another growth engine the company can lean on.
Nonetheless, it's almost a certainty that AWS will keep rising in importance in the years ahead.
