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Amazon Web Services: The Number One Reason To Hold Onto AMZN Stock

AWS surprised analysts when Amazon released its first-quarter results. The company’s cloud arm remains its main source of revenue and has kept Amazon stock from sinking deeper into unprofitability.

Why has Wall Street kept its consensus “overweight” rating on Amazon despite the company’s lackluster results over the past few quarters? To explain, we only need three letters: AWS.

Amazon Web Services is the only one of Amazon’s segments that actually surpassed analysts' projections this past quarter. The cloud arm generated $18.44 billion in revenue during Q1, a healthy $100 million above the consensus expectation of $18.27 billion. Here is why we are excited about AWS’ - and Amazon’s - future.

Figure 1: Amazon Web Services: The Number One Reason To Hold Onto AMZN Stock

Figure 1: Amazon Web Services: The Number One Reason To Hold Onto AMZN Stock

(Read more from Amazon Maven: Amazon Post-Earnings: What Wall Street Is Saying)

The Cloud Industry Is Growing Fast; AWS Is Growing Even Faster

According to Synergy Research Group, the cloud computing industry grew a whopping 34% during the first quarter of 2022 alone. During that time, enterprises spent nearly $53 billion on cloud computing services.

This is an impressive growth rate, even for an industry in its early stage. But was this quarter an outlier? Not at all. In fact, this is the eleventh time in the past twelve quarters that the cloud market expansion rate fell in the 34-40% range, on a YoY basis.

And it gets even better: since the cloud market has decreasing marginal costs, market leaders — AWS, Microsoft Azure, and Google Cloud — benefit from scale advantages. We can verify this fact simply by looking at AWS’ results. Amazon’s cloud arm expanded 37% last quarter, meaning it grew at a higher rate than the overall market.

When we zoom out further, the cloud market seems to be converging towards consolidation in the “Big Three.” Together, Amazon, Microsoft, and Google own 65% of the market, and all three are growing at a faster rate than their smaller competitors. Since the first quarter of 2018, the collective revenue of non-Big-Three cloud service providers has grown by 150%. Yet during the same period, their market share has shrunk from 48% to just 35%.

A Recession-Proof Market

As we dive deeper into AWS’ numbers, we find there is no correlation between Amazon’s cloud segment and its e-commerce segment. AWS presented its best YoY growth rate for a first quarter since 2019, suggesting the cloud industry is resilient in the face of macroeconomic uncertainty and is relatively unaffected by periods of high inflation.

In fact, not even the microchip shortage is expected to affect the cloud juggernaut. In a CNBC interview, AWS CEO Adam Selipsky explained how the company develops its own chips in-house; it also plans on designing chip models that are even more efficient than the ones used on the market today.

The Best Opportunity

As for competition, AWS has the upper hand. The Seattle-based titan has 33% of the cloud market and it historically grows faster than the industry’s overall expansion rate.

Figure 3: Cloud infrastructure services market.

Figure 3: Cloud infrastructure services market.

However, Microsoft Azure and Google Cloud remain a considerable threat to Amazon’s cloud kingdom: according to Synergy Research Group, Microsoft has 22% of the market and it has been gaining almost two percentage points of market share per year. Google Cloud has 10% and has been growing nearly one percent of market share over the same period.

When it comes to valuation, it is hard to compare cloud segments in isolation — but we can look at tech companies in general. Here, Amazon seems to offer the best buying opportunity. According to TipRanks, the average price target on AMZN is $3,750, representing 50% upside. Meanwhile, consensus targets on Alphabet and Microsoft are at $3,250 and $350 respectively, implying upside of 37% and 25%.

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting The Amazon Maven)