Amazon Earnings Questions the Faith of AWS Bulls

Last week, I published an article analyzing six cloud platforms based on their earnings report. The article was published ahead of Amazon’s earnings and used some of its guidance numbers. well, last Thursday, Amazon reported earnings and the numbers have brought some interesting questions about AWS’ growth trajectory.

Before we go too far, let me clarify that I believe that both Amazon and AWS’ numbers were outstanding and that the questioning is more a result of your typical Wall Street analyst rhetoric than based on reality. Despite that, the argument is worth discussing.

Amazon’s fourth quarter numbers brought a raise on profit of 55% to $729 million which exceeded the retail giant’s guidance. Revenue was the weakest spot on the earnings report with an increase of 22% to $743.7 billion which was below analysts’ expectations. Amazon’s stock traded down by more than 4% after hours.

In terms of AWS, the revenue of the cloud platform grew 47% year over year to $3.5 billion. the number missed analysts’ estimates by 2%. Some experts blame the miss on Wall Street’s inability to account for adverse currency impacts. Regardless, after the report, analysts started to question AWS’ ability to continue its growth trajectory. Based on the last earnings, it is pretty obvious that Microsoft Azure is growing at a faster pace year-on-year.

Before you disregard Wall Street’s analysis about AWS as stupid, you should put it in the context of Amazon’s stock. Growth is every for Amazon shareholders. At this point, the stock is trading at 100 time forward earning which is absolutely ludicrous unless you think the company can continue its double digit growth trajectory. Having said that, Wall Street’s doubts seem a bit exaggerated when comes to AWS.

Last year absolutely consolidated AWS as the cloud platform market leader. To put some of the numbers in perspective, J.P Morgan Chase estimates Microsoft Azure revenue at about $2.7 billion for 2016. That number represents about 22% of AWS revenue for the same period. That’s a massive gap between number one and number two on any technology market.

Considering that most of Wall Street’s concerns about AWS were related to its growth, I would like to discuss a few areas of growth potential that AWS is in a unique position to exploit in the near future.

4 Areas of Growth for AWS in the Near Future

1 — Alexa: Voice interfaces are rapidly growing in popularity. Alexa together with complementary AWS service such as Lex are in a unique position to drive that market.

2 — Artificial Intelligence: As the artificial intelligence(AI) market evolves and AWS improves its AI suite of services, we are likely to see huge AI workloads to move to the AWS cloud.

3 — International Expansion: IT-savy India remains a market that can bring a tremendous level of growth to AWS. Battling AliCloud in China and expanding its presence in Latin America could also influence the near term growth of the cloud giant.

4 — Drones & VR: Drones and virtual reality(VR) backend are two areas that could move the niddle for AWS in the ear future. Both types of solutions require high performance , expensive, large-scale backend that are ideal for AWS.

CEO of IntoTheBlock, Chief Scientist at Invector Labs, I write The Sequence Newsletter, Guest lecturer at Columbia University, Angel Investor, Author, Speaker.

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