Amazon.com's (AMZN - Get Report) early efforts to invest in cloud computing are starting to pay off handsomely as Amazon Web Services (AWS) increasingly becomes the crown jewel of Jeff Bezos's Internet empire.
On Tuesday, the Seattle-based Internet company concluded on Tuesday its two-day annual AWS summit in Chicago. While Amazon didn't announce any major service developments, it did highlight positive expectations for AWS and industry trends that will work in favor of the cloud computing business.
"The tone was uniformly bullish, especially about the pace of large enterprise adoption, and we didn't uncover signs of fundamental issues in 1Q16 that would prevent AWS from posting another very strong quarter," wrote Deutsche Bank analyst Karl Keirstead in a Wednesday note, describing this as a "stark contrast" to weak first-quarter earnings from some IT infrastructure giants such as IBM (IBM - Get Report) , Intel (INTC - Get Report) , Juniper Networks (JNPR - Get Report) and Seagate Technology (STX - Get Report) .
"We continue to view AMZN as the best way to play the mega-trend toward the public cloud," Keirstead noted.
The industry is heading toward the cloud-- the idea of using remote servers on the Internet to store information, as opposed to physical hardware -- because of its speed, price efficiencies and adaptability, said Burke & Quick Partners analyst Frederick Moran in a phone interview.
Amazon essentially created the cloud business model in 2006 when it first offered outside companies the ability to use its infrastructure to store their data and information remotely. Since then, AWS has become an impressive engine of growth for Amazon, Moran said, adding that the unit saw its revenue grow by almost 70% in 2015 to about $8 billion.
The e-commerce behemoth has achieved this feat through internal investments and aggressively spending billions of dollars in capital to develop its offerings, he added.
"It's a big contribution to revenue, and an even bigger contribution to profitability," Moran said of the unit, which offers a suite of computing, storage, database and other IT infrastructure-related services.
Moran said that the cloud computing unit is a rising star within the Amazon umbrella and should be able to maintain around 70% revenue growth and deliver 30% margin on that revenue, predicting that the group is likely to generate about $13 billion in total revenue this year. That represents about 10% of overall revenue for the company.
"I think it's hard to be negative about Amazon Web Services," said Needham & Co. analyst Kerry Rice via phone. "It has grown tremendously. It still grows at a very fast rate despite its size."
In fact, AWS has emerged as a great source of support for the backbone of Amazon, he said while acknowledging that it is also facing competition from other tech behemoths investing in the sector such as Microsoft and IBM.
"Meetings this week at AWS Summit reinforced our bullish view that the secular shift to cloud is gaining momentum, particularly within large enterprises. Interestingly, enterprises are deploying larger and larger chunks of cloud services this year," wrote Pacific Crest analysts in a Tuesday note, adding that the e-commerce giant is well-positioned to capitalize on the ongoing shift to cloud.
For large enterprises such as Kellogg (K - Get Report) , General Electric (GE - Get Report) , Ford Motor (F - Get Report) and Johnson & Johnson (JNJ - Get Report) , there's a growing sentiment that renting a portion of Amazon's data center footprint makes more sense than internally building facilities equipped with servers and networks, Pacific Crest analysts in a Tuesday note.
For Amazon as a whole, an interesting question remains whether it will dip its toes further into fashion, Needham's Rice said.
Still, there's risk associated with increasingly high expectations from investors, he said, adding that those with a long-term view could ultimately get rewarded.
Shares of Amazon were up 1.3% mid-day Wednesday, trading at $635.71 a piece. The stock is down about 6% year-to-date.
Amazon could not be reached for comment Wednesday.