This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Jeff Bezos Is Fearing Google's Next $20 Billion Business

Stocks in this article: AMZN GOOG GOOGL AAPL

NEW YORK (TheStreet) -- Google's (GOOG) next $20 billion business may take aim at Jeff Bezos-led Amazon (AMZN) and not Apple (AAPL), as the company ramps up various initiatives, the latest being Google Computer Engine. Google Computer Engine may be a $20 billion business by the end of the decade, competing directly against Amazon Web Service for the hold of the infrastructure-as-a-service (IaaS) market.

Bernstein Research analyst Carlos Kirjner said in a Friday client note he believes Amazon's (AWS) will reach revenue of at least $20 billion by the end of the decade and that Google's Computer Engine may end the decade with an equally profitable and large cloud infrastructure business. "Together, Amazon and Google's cloud business could very well exceed $40 billion in revenues by the end of the decade, and perhaps much more," Kirjner wrote.

The way Kirjner sees it there are more than a handful of players trying to win the infrastructure-as-a-service (IaaS) market, but only two or three companies will ultimately succeed. Amazon, with AWS, has already proven to be a credible player. Google is making quick strides in the Iaas market that Kirjner believes will succeed. Possibly, Microsoft (MSFT) will also succeed, according to the analyst.

About Verizon (VZ), AT&T (T), VMWare (VMW), Hewlett-Packard (HPQ), Centurylink (CTL), BT and Cisco's (CSCO) efforts to enter IaaS, Kirjner said "we have very little doubt that they do not have the right computer science and engineering skills and assets to compete with Amazon, Google, and Microsoft."

Currently, the analyst estimates AWS's 2013 revenues were in excess of $3 billion, growing more than 85% from 2012 levels, while Google Compute Engine earned $100 million or less in revenue. "Microsoft, probably booked a few hundred millions in infrastructure-as-a-service revenues in 2013 as part of Azure, certainly a figure that is much closer to Google Compute Engine's revenues than to AWS's," Kirjner wrote.

Those figures suggest AWS may have a 70%-to-75% market share in the IaaS market. Even if the competition has a 25% market share, Kirjner believes in-process projects at the likes of Amazon, Google and Microsoft may make the gap even larger.

"We believe that in addition to Amazon, only Google and Microsoft have a real shot at being at scale IaaS providers. IBM also cannot be dismissed, but it is not clear to us they have the right experience and expertise, even after the acquisition of Softlayer, or the economic incentives to push public cloud services aggressive," Kirjner wrote.

Price Cuts, Moore's Law

In March, Google said it would cut pricing for Google Computer Engine by 32%, surprising some analysts and business users. Kirjner believes the price cuts have only begun between Google and Amazon, potentially making it prohibitively risky for those seeking to enter the market. "This is just the very beginning of Google's journey to build a competitor to AWS," Kirjner said.

Potential future price cuts may leave some tech heavyweights on the sidelines, but there is reason to believe IaaS will be a profitable endeavor for Amazon, Google and Microsoft. Kirjner believes the steady-state operating margins of IaaS businesses at Amazon and Google can exceed 25% and that return on invested capital can exceed 20%.

The key is that for IaaS providers that operate at scale, price cuts may not outrun expense reductions as cloud computing power increases. "The saving grace for the cloud providers is that the vast majority of their COGS, including server and infrastructure depreciation, as well as power consumed, scale with Moore's Law and also decline 20% 30% per year, so their gross margins will remain the same if they cut prices at that rate," Kirjner wrote.

If AWS and Google Computer Engine operate at a very high server utilization, they can turn IaaS to a profitable endeavor. "[We] think the public cloud business works at scale because AWS and possibly Google Compute Engine will be able to operate at very high server utilization; high enough to drive gross profits on a per server basis and at a large enough scale to offset the fixed costs (R&D and G&A)," Kirjner wrote.

If Google's war with Apple in the mobile device market (by way of Android) and Amazon's increasing threat to retailers as large as Wal-Mart (WMT) and Target (TGT) get the most press, it is a brewing combination between the two burgeoning cloud computing powerhouses where a next fight in Silicon Valley may quietly take hold.

-- Written by Antoine Gara in New York

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,804.80 +26.65 0.15%
S&P 500 2,070.65 +9.42 0.46%
NASDAQ 4,765.38 +16.9840 0.36%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs