Amazon’s Cloud & Web Services Business is Growing, But Won’t Move Stock Much

March 14th, 2011 by Trefis Team
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Amazon (NASDAQ:AMZN), apart from being a major online retailer of books, DVDs, music, games, apparel, and other merchandise, also has a small business of providing cloud and other web services. It offers web services like cloud computing and cloud storage service offerings, in which it competes with bigger players like Google (NASDAQ:GOOG), Microsoft (NASDAQ:MSFT) and Salesforce.com (NYSE:CRM). Amazon also owns & operates websites such as Audible.com, IMDB.com, and Shelfari.com.

Cloud and other web services together account for only around 3% of Amazon’s stock by our estimates. The company’s revenues from this business has grown at a steady rate over the years, and we expect the growth to pick up driven by increased outsourcing of web services and growing demand for online media and web 2.0.

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While we expect Amazon’s cloud and other web services revenues will reach over $5 billion by the end of our forecast period, Trefis members project the revenues will touch $6 billion. The additional revenue of $1 billion (projected by Trefis members) will not have a great impact on Amazon’s stock because the contribution of the cloud business to Amazon’s overall stock value is limited compared to the online retailing business.

We currently have a Trefis price estimate of $181 for Amazon’s stock, about 7% above the current market price of $168.

Outsourcing is Cost-Effective for Web Businesses

Running IT infrastructure is a non-core activity for most web-based businesses and is hardly a differentiating factor. As such, cost becomes the primary determinant as to whether to run the infrastructure in-house or have it outsourced. We believe Amazon web services provide a very cost-effective way of providing those services: there is no upfront fee, no long-term commitments, and consumers pay based on usage.

Growth in Online Media, E-Commerce, Web 2.0 Driving Demand

Increasing broadband penetration, more secure online payment mechanisms, and social networking are all factors driving massive growth both in terms of (1) new company platforms and services going online; and (2) people spending more time online. This trend increases the addressable opportunity for outsourcing to web service providers like Amazon.

Trefis Community Forecast

Trefis members forecast Amazon’s cloud and other web services revenues will increase from $1.7 billion in 2011 to $6 billion by the end of the Trefis forecast period, compared to the baseline Trefis estimate of an increase from $1.4 billion to $5 billion during the same period. Since cloud and other web services constitute only around 3% of our price estimate for Amazon’s stock, we do not expect much impact from higher member estimates.

See our complete analysis for Amazon’s stock.