If you want to talk bragging rights, e-commerce kingpin Amazon.com (AMZN 0.25%) has an accomplishment or two on which to hang its hat. Case in point: Look no further than the annual letter to shareholders released last week by the Seattle-based Amazon and its CEO Jeff Bezos.
Aside from being chock-full of various humblebrags, the letter offered some unique insights into the state of affairs, both small and large, at one of the world's most-important technology enterprises. Of particular note, Amazon's CEO went into great detail discussing, among other things, why Amazon's cloud-computing business deserves investors' attention.
Bezos on AWS
Over the course of several pages, Jeff Bezos goes to great lengths to contextualize Amazon's priorities, and perhaps more importantly, the business principles that have propelled the company to such extraordinary heights. As a case study, he dedicates particular attention to Amazon Web Services (AWS), the company's booming cloud-computing business. AWS just passed the 10th anniversary of its launch, and the reporting segment arguably offers more promise than Amazon's core e-commerce platform.
As Bezos notes, AWS' $10 billion in sales exceeds Amazon's own revenues at the time of the company's 10th birthday. What's more, AWS is also growing faster than Amazon at that point in its history. However, Bezos argues that the service's accelerating pace of innovation is, perhaps, its most-compelling characteristic: AWS launched 722 "significant new features and services" last year, up 40% from 2014.
The Amazon chief attributes AWS' breakneck growth, in part, to the intangible traits that have long fueled the entire organization's greatness. These attributes include "customer obsession rather than competitor obsession, eagerness to invent and pioneer, a willingness to fail, the patience to think long term, and the taking of professional pride in operational excellence." Like the parent company more generally, AWS exhibits all these traits in spades. However, a number of additional factors also make it arguably Amazon's most-exciting potential growth driver.
Room to run
Like Amazon's core e-commerce operation, AWS lies at the epicenter of a major paradigm shift in a truly massive global market. Whereas Amazon's core e-commerce platform deals with the multi-decade expansion of online retail, AWS is the largest player in a similarly extended shift in enterprise computing workloads from on-site servers into the cloud. So how large a market are we talking here?
Gauging AWS' long-term potential, like the cloud-computing market as a whole, requires plenty of projection. Thankfully, it seems the outsized opportunity the cloud presents outshines any imprecision that might appear along the way.
Estimates are also difficult to come by, but researcher IDC predicts that the global market for public cloud-computing services will reach $141 billion by 2019. This also excludes other important market segments such as private cloud services, which also figures to be a revenue opportunity into the tens of billions of dollars for Amazon and its competitors. Over the long term, it seems safe to say that the cloud market will likely grow into a revenue opportunity in the hundreds of billions of dollars.
In addition, AWS could arguably be Amazon's most-exciting market opportunity because of the service's outsized profitability. According to Amazon's 2015 annual letter, AWS produced an impressive 23.6% operating margin, which blows the 2.6% operating margin of its combined U.S. and International retail operations.
It isn't clear whether AWS's cushy margins will prove sustainable over the long term because fierce price competition among large cloud providers, including Amazon, Microsoft, and Alphabet, have defined the industry's evolution. However, the compelling mix of growth potential and profitability make AWS another compelling reason for shareholders to believe in Amazon's overall long-term investment thesis.