Amazon's (AMZN +1.06%) second-quarter update, released on July 30, was so impressive that the company's stock has been rising ever since. E-commerce sales were strong during the period, advertising revenue accelerated compared to recent quarters, and the tech giant's most important segment, Amazon Web Services (AWS), posted a blowout quarter. AWS sales climbed by 37% year over year -- its fastest growth rate in 18 quarters -- to $42.2 billion. Amazon CEO, Andy Jassy, was full of praise for AWS, and (at least) one thing he said highlights just how impressive this business is.
Image source: The Motley Fool.
AWS is just getting started
Amazon was a pioneer in the cloud computing industry. The company turned AWS into the largest among the leading cloud providers. AWS has its peers beat in sheer breadth of capabilities, or its ability to handle the widest range of workloads. That's one of the reasons why, despite fierce competition, AWS has continued to grow at a good clip. And according to Jassy: "AWS is now a $169 billion annualized revenue run rate business, which, for perspective, would place it 24th on the Fortune 500 list if it was a stand-alone company."
That's already remarkable, but it also says something important about Amazon's future. In a letter to shareholders released earlier this year, Jassy reminded investors that 85% of IT spending still occurs on-premises, despite the significant advantages the cloud offers. As more of that spending moves to the cloud, the company's AWS business should continue to expand at a good clip and will eventually account for a much larger percentage of its revenue. AWS boasts better margins than the company's e-commerce business and already accounts for the majority of its operating income.
So, as AWS continues to grow, it will meaningfully lift Amazon's margins, resulting in a stronger, more profitable business.
NASDAQ: AMZN
Key Data Points
It's worth noting that Amazon has significant near-term visibility within its cloud business. The company ended the second quarter with a cloud backlog of $496 billion, up triple digits year over year. And although it now plans to record $220 billion in capex this year (up from its previous estimate of $200 billion), the company still isn't spending enough to meet the soaring demand for its services.
There will be other important dynamics over the medium term that will help boost margins, including Amazon's decision to increasingly rely on internally developed chips, which will help the company achieve operating margin gains within AWS. And there is the very real possibility that Amazon will eventually start selling these chips to other corporations, creating another lucrative growth avenue for the company.
What does all of this mean for Amazon? The future looks bright, even before we account for other segments that should also perform well. AWS makes a strong case for investing in Amazon. The rest of the business seals the deal. Even after Amazon's post-earnings jump, the stock remains a buy.
