AWS – What a business!

AWS, AWS, AWS

The importance of AWS to Amazon cannot be overstated.

Covid-19 was a blessing to Amazon between Q2 FY2020 and Q2 FY2021, boosting its top line significantly. As the economies opened up, folks got back to the stores and the YoY comparisons were clearly tough, growth became so much harder to find. North America’s 10% YoY growth this quarter is the lowest I have seen in the last five years. International took a 12% plunge after growing 38% and 36% in the same period in 2020 and 2021 respectively. Both segments reported negative operating margin, the third quarter in a row.

Amazon's Business Segment YoY Growth
Figure 1 – Amazon’s Business Segment YoY Growth

Meanwhile, this quarter saw AWS take home $19.7 billion in revenue, brining the turnover in the last twelve months to a tad more than $72 billion. Despite a rapid increase in scale, AWS still clocked in 30% YoY consistently in the last year and a half! Although the business only made up 16% of the parent company’s revenue, AWS was responsible for all of Amazon’s operating margin when North America and International were in the red. Traditionally, AWS has been the engine powering Amazon’s profitability. Now, it carries the company’s revenue growth as well.

For good measure, AWS’s potential is as good as its current numbers. While quarterly revenue is now almost at $20 billion, AWS has long-term commitments (from contracts of at least one year in length) of more than $100 billion. These commitments have never grown less than 48% YoY since they were first reported back in 2018. If we compare this unearned revenue to the rolling last twelve month sales of AWS, the ratio grew from 75% in Q4 FY2018 to 139% currently. It means that AWS has the last twelve month sales and 39% on top of that in unearned revenue!

AWS Quarterly Revenue & Unearned Revenue Commitments
Figure 2 – AWS Quarterly Revenue & Unearned Revenue Commitments

Amazon management knows that they have a gem in possession and they are spending money to keep that gem. Let’s look at it this way. AWS sales in the last twelve months totaled $72 billion. The company is trading at $1.25 trillion today. The market capitalization is about 17.4 LTM sales. If we project the next twelve months’ sales is about $83 billion, the multiple is 15. Some argue that means we get the Retail business for free and like it or not, they may have a point!

In 2021, the company splashed $24 billion on technology infrastructure which includes support for AWS. They planned to increase total capital investments in 2022 and more than half would go to infrastructure. It’s not certain that more CAPEX would mean more growth or revenue. But it’s a positive sign that a company is willing to open its checkbook to deepen the moat of its star business.

Andy Jassy, the current CEO of Amazon and the man credited with the success of AWS, said previously that Amazon actually stumbled upon this amazing business. At the beginning of the 2000s, after working diligently to improve the internal tools that supported the eCommerce site, Amazon realized that they were really good at running infrastructure services. It took three more years of planning and preparation after such realization before the company launched what is now a highly important and lucrative business in AWS. What a serendipitous discovery!

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