What if you invested $1,000 in Amazon (AMZN 3.43%) when it started taking cloud computing seriously? Let's take a quick walk down memory lane and check out how that investment would look today. Spoiler alert: Owning Amazon stock for a long time tends to be profitable.
A brief history of the AWS launch
The largest cloud computing platform has been around for a long time. Amazon launched the first version of Amazon Web Services (AWS) way back in 2002, starting as a completely free developer framework for linking third-party websites to the main Amazon e-commerce store's content.
The moneymaking features of AWS dropped in one by one, often heralded by free-of-charge beta versions. The company inched closer and closer to making AWS an actual business as the free services garnered attention and widespread use. I would argue that the cloud computing service was an operational business by Aug. 25, 2006, after launching the S3 cloud storage service and the actual Elastic Compute Cloud (EC2) cloud-computing platform.
S3 and EC2 weren't just technology experiments -- they were the first major steps in Amazon's journey to redefine and dominate the cloud computing landscape.
And that was a long time ago. Back then, Amazon wasn't the multisector giant you see today. Trailing revenues stood at $9.3 billion, supporting a mid-range market cap of $11.7 billion. On that fine August twilight afternoon, the split-adjusted price of one Amazon share stopped at just $1.40.
Amazon's market-stomping returns
So let's see what a hypothetical $1,000 investment in Amazon in August 2006 would be worth today. I'll compare it to the S&P 500 (^GSPC 1.02%) market index for a sense of scale, with and without reinvesting dividends over the years:
That modest $1,000 Amazon investment at the dawn of its cloud computing business would be worth $11,440 today, just short of two decades later. The broader market delivered respectable gains in the same period, rising 275% without dividend reinvestments and 430% in terms of total returns. But it's hard to keep up with one of the greatest business growth stories in history.
Timing the market? Nah, the real secret to successful investing is time in the market.
Why I'm looking at this particular time span
I didn't pick the start of AWS as the buy-in point for this thought experiment on a whim. If I really wanted to impress you with big numbers, I'd point out that a $1,000 Amazon stake on the date of its initial public offering (IPO) in 1997 would have grown to $1.6 million by now. Getting in early on tomorrow's greatest winners can result in truly epic returns.
Today, Amazon boasts trailing sales of $554 billion and a $1.6 trillion market cap. That old share you could have bought at a split-adjusted $1.40 per stub in 2006 is now worth $155. Of course, that date is so far back in the mists of time that your brokerage may have charged additional fees for buying and selling less than a "round lot" of 100 shares.
Hence, the realistic minimum order for a round lot of Amazon shares works out to $2,800, accounting for the 20-for-1 stock split in 2022. That's $308,000 at today's share prices. Cumbersome market rules can be helpful sometimes.
But that's not exactly the point of my chart. I think Amazon without the AWS business would be a much smaller and weaker business today, as this operation has evolved into the company's most lucrative profit center. Long-term Amazon investors have seen game-changing benefits from the cloud computing experiment, including a large slice of that 10,940% gain over 18 years.
Why is AWS a big deal?
AWS started from nothing in 2006, but quickly built a reputation for reliable and low-cost computing services. By 2010, the platform had earned the trust and business of many large-scale customers. For example, Netflix (NFLX -0.63%) moved its entire digital infrastructure to AWS in 2010, preparing to launch its video-streaming service as a stand-alone business on AWS and its content delivery network.
Today, the cloud computing market has evolved significantly. Netflix has replaced its AWS content delivery services with its own Open Connect network, but still runs the rest of its business on thousands of AWS EC2 instances. That's just one example among Amazon's large and growing collection of big-name AWS clients leaving their digital "heavy lifting" to the leading cloud platform.
And it's a big business now. AWS accounted for $2331 billion of Amazon's third-quarter revenues (one quarter, not a full year) or 16% of the total revenue flow. But AWS services are far more profitable than the low-margin e-commerce business, so AWS stood for $7 billion of operating income in the same period -- a 64% share of Amazon's total operating profits.
The story doesn't stop there. AWS is also a leading provider of cloud-hosted artificial intelligence (AI) services. That connection should fuel AWS's growth fires for years to come.
"We have been surprised at the pace of growth in generative AI. Our generative AI business is growing very, very quickly," CFO Brian Olsavsky said in last October's third-quarter earnings call. "Almost by any measure, it's a pretty significant business for us already. And yet, I would also say that companies are still in the relatively early stages."
So AWS has lifted Amazon to a trillion-dollar market cap -- not all by itself, but as a powerful and profitable rocket booster -- and the beat goes on. Future investors may look back at 2023 and 2024 as the start of another game-changing growth era, worthy of its own look in the rearview mirror.
Until then, you may go searching for "the next Amazon," but the real deal is still a market-moving behemoth -- and you can thank AWS for most of its profits these days. Most investors didn't see that digital future coming in 2006.
