Why did Amazon's (NASDAQ:AMZN) earnings send the market into a frenzy? Here's a hint -- AWS.
Join Sean O'Reilly and Dylan Lewis as they break down the week in tech news on this episode of Industry Focus.
A full transcript follows the video.
Sean O'Reilly: Amazon's market cap has gone up by two Zimbabwes today on this tech edition of Industry Focus.
Greetings, Fools! I am Sean O'Reilly here with Dylan Lewis. How are you today, sir?
Dylan Lewis: Doing all right. Not quite as well as Amazon's doing today.
O'Reilly: No. I don't think anybody is. Boy, it'd be nice to be Jeff Bezos, huh? So, if you're just joining us we're here at Fool headquarters in Alexandria, Virginia and we want to talk about Google Fi today and their new cell phone service. But we pretty much just had to talk about Amazon because of this epic stock price move that they made following the earnings.
Lewis: Yeah. Their earnings kind of forced the issue.
O'Reilly: I'm still -- if you saw my tweet, I'm still processing all of this. Real quick, just explaining what I said initially; last year Zimbabwe's GDP was $12.8 billion and Amazon's stock market capitalization just went up by $27 billion. So, you might say that Amazon just went up by more than two Zimbabwes.
Lewis: Yeah, and looking at the market reaction, it's about a 15% bump from where they were pre-earnings.
O'Reilly: Had you told me that this would happen I would have said "You're nuts." I would not have -- there's no way. Anyway. So, Dylan; what was so great about their earnings?
Lewis: For the first time Amazon broke out the financial results from AWS -- Amazon Web Services.
O'Reilly: Whoa. Amazon told us what comprised their results?
Lewis: Well, some of their results.
O'Reilly: That alone is worth the stock price boom. That's like -- whoa.
Lewis: Yeah. They've been notoriously opaque in the past. So, this business segment's been around since 2006 and this was the first time they've broken it out. They've provided backtrack data to Q1 2014. So, some insight into the business segment. Just some background; AWS is web services, remote computing services that make up Amazon's cloud computing platform. Generally, just a suite of products that are marketed as service to provide quick, cheap, large computing capacity to a client company instead of building out their own server farm.
O'Reilly: Did you know I'm an AWS customer?
Lewis: You know, you mentioned it a couple days ago.
O'Reilly: I use it to store the thousands upon thousands of photos that we have of my 15 month old son. It's really handy. We've got the Amazon photo app on our iPhones and we open it, and it just automatically uploads all the photos that are new that it hasn't uploaded already. It automatically does it whenever I'm on Wi-Fi and it's quite handy.
Lewis: According to the market, that's where the money is.
O'Reilly: I gave them-
Lewis: People storing pictures of their kids.
O'Reilly: I gave them my – yeah. Yeah. I gave them my $20 for 20GB, and we've got a crapton of videos. That's what it is. So, yeah. I originally got it -- they give Amazon Prime customers as well -- they give you unlimited photo storage as part of that. Then, I don't know, I realized my phone was full of videos of my son laughing and I was like "Shoot. I should probably delete some of these." But I didn't want to delete them because they're my first child. So, I gave Amazon 20 of my dollars to store them for me.
Lewis: Yeah. Well they're happy for that, I think.
O'Reilly: Is AWS profitable? I think that's what we all want to know.
Lewis: Yeah. We're getting there. So, yeah. It is. A lot of people were speculating about that. They weren't sure. So, being in operation for nine years now, not really sure what it's contributing. People were aware of its market share. So, they are the largest in the space right now. They have about 1/3 -
O'Reilly: Sorry to interrupt. They're multiples bigger than the next person.
Lewis: Right. Yeah. They have a 30% market share worldwide in cloud and structure services. Next closest: Microsoft (NASDAQ:MSFT) with about 10%, 11%. Typical players for tech still in this space: IBM (NYSE:IBM), Google -- trailing. So, they're the largest player, but the big question was -- this is a very capex, intensive business segment.
O'Reilly: A bunch of servers, basically.
Lewis: Yeah. They're providing all the infrastructure and making it easy for you to plug and play, basically.
O'Reilly: And they're beating Microsoft and Google. That alone is cool.
Lewis: They're not just beating them. They're crushing them.
Lewis: So, looking at the results, they had about $1.5 billion in net sales coming through the segment.
O'Reilly: For the quarter, yeah.
Lewis: Yeah. For the quarter. Good for second operation income of about $260 million. So, people are really happy to get the insight and the clarity form Amazon. I think there's some caveats that we need to look at with this. You look at their net sales by segment and the way they break things out now. North America, International, and AWS. North America had $13.4 billion in sales. International: $7.7 billion. So, AWS is 7% of net sales.
O'Reilly: And that drove a $7 billion stock price move, probably.
Lewis: Yeah. The big news, I think, that people are really interested in is, it's something that is growing and it's high margin. So, the North America segment operates at a 3.5%, 4% operating margin. International operates at a loss, but AWS is around 17%.
Lewis: Yeah. And that's what it was this past quarter. Historically it's fluctuated between 8% and 23%. So, I think 17% is probably pretty reasonable to expect moving forward.
O'Reilly: Yeah. Does Amazon sell books still?
O'Reilly: They do? Okay. I didn't know that. I booked a vacation on Amazon the other day.
Lewis: Amazon Travel.
O'Reilly: Yeah. It was -- I'm kidding.
Lewis: But you can now. They announced that.
O'Reilly: You can. Yeah. They've got 'book a vacation at a bed and breakfast in the northeast'. Okay, Bezos.
Lewis: So, I think a lot of the excitement with the stock push recently has been related to some of the comments that management's made. So, Jeff Bezos estimated that AWS is a $5 billion business, and still growing. So, if you look at the operating margin at 17% that puts it at about $800 million in operating income a few years out. Based on his $5 billion sticker figure.
So, there's some potential there, but the reality is the North America, International segments which operate with media and devices; they're still their bread and butter and going to make up the majority of their revenue mix.
O'Reilly: Unbelievable. Who would have thought? Of course, one of Motley Fool co-founders David Gardner's been holding Amazon since the late '90s.
O'Reilly: Happily. I'm sure he's very happy today. But who would have though? "Oh, yeah. We'll be doing this cloud service stuff that'll store stuff for everybody and make a ton of money on it." Who would have though?
O'Reilly: So, anyway. On to the other big tech news of the week -- which happens to be Google's new cell phone service.
Lewis: Because, why not?
O'Reilly: Why not? We've got Fiber, we've got Search Engine; why not have a cell phone service? Really, it's not -- you're not going to be able to go to the mall and go to the Google Cell Phone store, or anything. They are what is considered a third party cell phone service, but it's called Google Fi. They just busted it out and what's really making the splash is their pricing.
They're basically making deals to pay Sprint (NYSE:S) and T-Mobile (NASDAQ:TMUS) for use of their networks, and the phone -- which is on the plan, which we'll get to in a minute -- switches to whichever network is best wherever you are. It's a flat $20 per line, and $10 per GB of data. The best part about this -- what everybody's talking about -- is you get a credit the next month for any data you don't use.
So, if you pay for 3GB of data -- which is $30, $10 per GB -- and you only use half of that, you'll get $15 the next month.
Lewis: Yeah. I know most people don't come near their data caps with their cell phone services.
Lewis: So, I'm sure a lot of people are happy about that. But it seems like there are some limitations with Project Fi.
O'Reilly: There are. It's sad. The first one -- and this is what really bugs me -- is you have to use the Nexus 6 phone as manufactured by Motorola which Google bought a bunch of a couple years ago. I like my iPhone right now.
O'Reilly: I'm sure there's a lot of loyal Amazon Fire phone customers that are sad. I'm kidding. No, it's -- you're tethered to the Nexus 6, and that's restrictive. That's not -
Lewis: Yeah. I don't even know what their market share is, but-
O'Reilly: It's not high.
O'Reilly: We're not knocking anybody, we're just calling it like we see it. That being said, it is what it is. It's still being billed as Project Fi. If you go to Google's website and type in "Fi", it's not an actual business line the same way that Fiber isn't a real business right now -- but it's actually huge. Anyway. So, still being built as a side project. So, no iPhones. Sorry. The other thing is, it's available in limited areas. That being said, I looked at the map and it's available in pretty much every major metro area. Sorry, Montana.
The other thing is, it's not as cheap as we were hoping. They don't really do the plan thing just yet. A single person can go over to T-Mobile right now and get 1GB of 4G LTE data, plus unlimited talk and text for $50. That's obviously more than the $30 that an individual person could do just going with Google Fi. The trick with that is, if you're a couple, or you have a family or something like that, you can't share data as of yet. My wife and I, we don't use a ton of data.
We're on Wi-Fi all the time. We'd be paying for an extra GB of data -- that extra $10 that we don't actually need. So, it's still a project. Still in its infancy. I don't know if it's going to be huge yet. I don't know if they're just doing it to further ingrain their search engine in the increasingly mobile world that we live in.
Lewis: Another limitation, as I understand of the project right now, is that there's no contract model. So, there's no hardware subsidy.
Lewis: So, you're paying $600 for that Nexus phone.
O'Reilly: You are. And that's kind of where the industry's going. The people that really broke the ground on this was T-Mobile. I experienced this for the first time when I left -- I'll just throw that out there -- I left Verizon (NYSE:VZ) to go to T-Mobile. They do allow you to -- they basically spread the cost of the phone over two years, but if I were to leave T-Mobile and go to Google Fi, I would immediately owe them $700 for the iPhone that I got.
Lewis: Yeah. You're still on the hook for it.
O'Reilly: Right. So, it's -- I like Google Fi for what it is forcing the industry to do; which is getting away form the subsidies and the contracts and the blah, blah, blah. Because if you go to AT&T (NYSE:T), Verizon, Sprint; they want you on a contract because that's how they want to know that they're going to make their money. T-Mobile: they don't. I'm on a month to month thing and just keep rolling with it.
Lewis: Oh, they love the 2 year contracts.
Lewis: Because they know people just reup and don't even think about it.
O'Reilly: "You're paying for the coverage."
Lewis: Something that I thought was pretty cool with the Project Fi is how seamless it's looking to be -- cross device. I think the name of the game here is accessing across multiple, compatible devices. So, I think everything that's friendly with Google Hangouts allows you to access your phone number.
O'Reilly: Oh, really? Oh, boy.
Lewis: So, yeah. It's very similar, I think, to what Apple's (NASDAQ:AAPL) done with their Mac, iPad, iPhone integration. I think -- I love that, personally. As someone that's very deep in Apple's ecosystem -- and I'm sure Android users, there's some appeal there if they can-
O'Reilly: You're seeing these companies are trying to -- this brings us back around to Amazon -- they're trying to have a broad array of services that makes them like an ecosystem.
O'Reilly: It's probably why Google's doing the Fiber, and the phones, and they've bought -- why are they buying mobile? Why'd they buy part of Motorola? This is just part of their long term plan. Bringing it back around to Fi and the history and everything -- I didn't know this at the time -- but apparently Google's been on our side the whole time with cell phone services.
We're obviously in 2015, but this actually started way back in 2008 when Google wrote out a set of provisions at an FCC auction on how they wanted wireless spectrum in the 700MHz bands to go. Basically, they wanted openness and wanting open applications, devices, services and everything. I remember back then -- and only recently -- a Verizon phone could not work on AT&T.
Lewis: Oh, yeah.
O'Reilly: Even your iPhone 4S. It's Verizon. You have to -- it's a huge hassle, but now with the iPhone 6 you can actually go over to T-Mobile, or Verizon, or Sprint, or whatever. It wasn't always that way. Apparently Google was one of the reasons for this change.
Lewis: Yeah. I guess you can see the fore planning there with them meshing two service providers together.
O'Reilly: Right. Dun-dun-dun.
Lewis: Pretty brilliant.
O'Reilly: Yeah. So, that's kind of cool. I can't imagine too many areas where Sprint's vastly superior in terms of network quality than T-Mobile, but it's kind of cool that it switches between the two.
Lewis: So long as it functions as it's supposed to.
Lewis: Anytime you have something that's patching together coverage there's always that possibility of it just going haywire.
O'Reilly: They claim that the Nexus 6 is the only phone that's able to do this in the hardware and he software and everything. So, maybe we should just go buy one and then make it a burner phone, or something.
Lewis: WE can do that. So, what's your takeaway here with Project Fi?
O'Reilly: Given that you have to use a Nexus 6, I probably won't be running to try Fi anytime soon, but if they every allow the iPhone 6, or the iPhone 7 in a year, or two that then had the hardware capabilities to switch between networks; I would do it. It'd be cool. Even if we were overpaying a little bit for the data. The fact that you're using the credits and -- we went over one month. It's not like we're [...] with our data usage. I would do it.
Lewis: Do you think this is similar to what Fiber's forcing with wireless providers?
O'Reilly: That's the real benefit to this. Even if you never get on Fi, long term this will force the major carriers to take and even further step in the direction of -- this was targeted by T-Mobile as I mentioned -- no contracts, not being jerks with data charges; all that.
Lewis: Yeah, because you're seeing that with the cities that Google Fiber's going to.
Lewis: They make all those providers in that area getting together.
O'Reilly: It's drastically cheaper just in that city where Fiber is. It's hilarious.
Lewis: So, maybe Google forces everyone else to become a good actor.
O'Reilly: One can only hope.
O'Reilly: Very good. Well, before we go I wanted to make our listeners aware of a special offer for all of our Industry Focus listeners. If you're looking for more Foolish stock ideas, Stock Advisor might just be the service for you. It is our flagship newsletter started over 10 years ago by Motley Fool co-founders Tom and David Garner.
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