Yes, everyone shopped their wallets dry on Amazon during the big holiday sales push. But don't forget that the AWS public cloud side of Amazon is likely to drive valuation and operating income going forward.
This article originally appeared on ZDNet.
Amazon will be the talk of Black Friday and Cyber Monday, but if you follow the money the more important event this week may be Amazon Web Services' re:Invent conference in Las Vegas.
Rest assured Amazon's e-commerce division will get most of the headlines this week, but you'd be an idiot to ignore the AWS roadmap and customer powwow taking place right after Cyber Monday concludes. Why? AWS' re:Invent conference has become a big customer event where the company outlines its AI roadmap, new services and architecture overview.
And if the economy goes shaky and consumer spending falters a bit, Amazon's market capitalization will be mostly driven by AWS, which is the public cloud computing leader. Certainly, Amazon's operating income will be driven by AWS even more than it is now.
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Consider the following:
- For the nine months ended Sept. 30, Amazon's North America e-commerce operation delivered operating income of $5 billion on net sales of $97.24 billion.
- The international e-commerce division had an operating loss of $1.5 billion on net sales of $45 billion for the same time frame.
- AWS delivered operating income of $5.2 billion on net sales of $18.22 billion.
In other words, Amazon's North America e-commerce unit had operating margins of 5.14 percent for the nine months ended Sept. 30. AWS had operating margins of 28.54 percent for the same period.
So while we all count Amazon's e-commerce revenue during the holiday shopping season don't forget cloud services bring in more net cash.
What's interesting is when you plot AWS's operating income out over a few years. Evercore ISI analyst Anthony DiClemente recently modeled out AWS operating margins through 2022. His conclusion: Long-term operating income margins are likely to top 35 percent by 2022 under what he calls "bullish, but still undemanding assumptions."
Indeed, AWS will account for half of Amazon's total enterprise value in 2020.
DiClemente's argument is that AWS could generate operating income north of $25 billion through 2022. AWS will continue to become more efficient and deliver operating income of $24.8 billion in operating income for 2022.
SEE: AWS re:Invent 2018: A guide for tech and business pros (free PDF) (TechRepublic)
AWS at this year's re:Invent has already announced new features that'll add up to better efficiency. For instance, AWS has added predictive scaling to its Auto Scaling system. In a nutshell, AWS is using machine learning to predict your expected traffic and EC2 usage. The model needs one day of data to start making predictions and then refines from there. This machine learning approach gives AWS and the customer more visibility into compute needs and capacity.
DiClemente argued that AWS is likely to only become more efficient over time. He wrote in a research note:
By mapping AWS's availability zones (AZ), we track the age of the AWS footprint over time; taken in conjunction with industry estimates that peg the fixed/variable cost of a data center at a 65%/35%, we are able to back into the trajectory of costs per new AZ, as well as the efficiency of AWS's footprint. Since 2014, AWS efficiency (which we define as incremental revenue per AZ adjusted for average age of the footprint) has expanded at a 24% CAGR, offset by fixed costs per AZ also growing 18%.
Evercore ISI analysts also noted that Microsoft Azure operating income margins are likely to be more than 20 percent by 2022. Why? AWS has more experience running cloud infrastructure at scale.
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What's interesting about DiClemente's note is that he uses AWS operating margins as a way to conclude that investors are getting a massive retail business more cheaply than currently appreciated. It's a thought worth banking with all the focus on Amazon's e-commerce sales.
Also see: Cloud TV | Karthik Rau, CEO of SignalFx, on new approaches to monitoring cloud, application microservices | Freshworks CEO Girish Mathrubootham on SMBs, AI and competing with giants | FAQ: What Arm servers on AWS mean for your cloud and data center strategy (TechRepublic)