Amazon.com (NASDAQ:AMZN) CEO Jeff Bezos is a busy man. When he's not running one of the largest e-commerce sites in the world, the CEO is busy with his privately owned aerospace company, Blue Origin, or keeping up with the news via The Washington Post, the newspaper he owns. Bezos currently occupies the No. 5 spot on the Forbes Billionaires List, with an estimated net worth of $45 billion.
So when Amazon's busy chief takes time to correspond with shareholders, it makes sense to pay attention. Recently, Bezos released Amazon's annual shareholder letter. Perhaps the biggest takeaway, highlighting Amazon's future profit driver, was hidden in plain sight, with Bezos discussing it in the first paragraph.
Bezos next $10 billion business
After noting Amazon reached $100 billion in annual sales faster than any other company, Bezos noted Amazon Web Services, or AWS, "is reaching $10 billion in annual sales." Additionally, Bezos noted decade-old AWS achieved that goal faster than the company's core retailing business. "AWS is bigger than Amazon.com was at 10 years old, growing at a faster rate, and -- most noteworthy in my view -- the pace of innovation continues to accelerate ..." Bezos wrote.
Amazon Web Services has been an important part of the company's growth story over the last three years. The service has grown from $3.1 billion in 2013 to $7.9 billion last year, growing 57% on an annualized basis. Overall, Amazon grew its top line at a 20% clip during that period.
At 7.4% AWS is still not a large portion of Amazon.com's total revenue mix, but it's growing. In 2013 the service was only responsible for 4.2% of the company's top line. However, the service definitely punches above its weight where it counts: earnings. In 2015 the company reported 23.6% operating margin in AWS, far above the 4.3% and -0.25% Amazon's North American and International retailing divisions produced.
Consolidation may help AWS
After years of solid growth with many firms entering the industry, it seems cloud computing is undergoing a period of consolidation. Research firm Forrester predicts that to continue in 2016 as major players, Amazon, IBM (NYSE:IBM), and Microsoft will buy or drive smaller players out of the business. Amazon's been able to grow revenue rapidly, and Bezos' comments appears to indicate the company expects strong revenue growth going forward.
IBM's been very acquisitive in this market by buying private-cloud-as-a-service company Blue Box and cloud-broker Gravitant last year. The company's most notable cloud and big-data-focused purchase was the $2 billion purchase of SoftLayer in 2013. IBM has continued to struggle as CEO Ginni Rometty attempts to transition the business from enterprise IT and servers to cloud. Unfortunately, IBM faces an internal battle where the success of cloud portends the slow death of the larger enterprise business.
Amazon, on the other hand, does not have that problem with retailing essentially unrelated to cloud computing. Amazon should fare well in high-margin cloud computing going forward. AWS was important enough for Bezos to mention the service in the second sentence of his shareholder letter. Investors would be wise to continue to watch its progress closely.
Jamal Carnette has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com. The Motley Fool recommends Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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