Veteran tech columnist Jon D. Markman publishes Strategic Advantage, a lively guide to investing in the digital transformation of business and society. Click here for a trial.)
It should now be clear that the migration to cloud computing is still in its infancy. Investors should look for opportunistic entry levels for all of the major firms.
After the close Tuesday Amazon.com ( (AMZN) - Get Amazon.com Inc. Report) reported spectacular financial results, buoyed by huge growth in its Amazon Web Services cloud compute division. Cloud is at the heart of digital transformation. That trend is booming.
You might never know. Despite the heady growth of AWS since 2006, the business has not received much notoriety among the investor class. For many the business of selling excess server capacity, processing power and data storage is amorphous. It’s far easier to tell the story of surging ecommerce revenues.
Amazon.com managers noted Tuesday that fourth quarter sales were in excess of $100 billion for the first time ever. The Seattle, Wash.-based company has become the dominant player in North America online sales, taking a whopping 47% share.
Beneath the surface though, cloud has become the future of the business.
One of the headlines from the Amazon Q4 financial results was that Andy Jassy, the founder and current leader at AWS, will replace Jeff Bezos as chief executive officer during Q3 of 2021.
Jeff Bezos, 57, is stepping down from the company he founded. The ex-Wall Street analyst famously started Amazon.com from the garage of his Seattle home. Each day Bezos would load piles of books ordered online into his family SUV and personally deliver them to the local post office. In those formative years all of the excess cash the business generated was being funneled into the countless web servers and software systems that kept the online store open 24/7. The excess capacity of that division later became AWS. Its leader was Andy Jassy.
The path to Amazon’s leadership was determined a year ago.
Jassy, 53, and Jeff Wilke, 52, then the leader of Amazon’s consumer business, were the only company executives who reported directly to Bezos. Both men joined Amazon in the late 1990s and were instrumental in building the company into a behemoth. They were also both widely considered to be on track to take over when Bezos was ready to surrender the day-to-day operations. Then, in August 2021 Wilke unexpectedly chose to retire.
The ascension of Jassy is a clear indication AWS will play a bigger role in a business that is currently hitting on all cylinders. The firm reported Q4 revenues reached a record $125.6 billion, up 44%. Earnings per share came in at $14.09, far in excess of the FactSet consensus estimate of only $7.34.
During the quarter AWS business momentum accelerated across financial services, media, technology, travel, ecommerce, electric utilities and automotive. Notable deals included JP Morgan Chase ( (JPM) - Get JP Morgan Chase & Co. Report); Viacom CBS; Twitter ( (TWTR) - Get Twitter Inc. Report); Star Alliance, the world’s largest airline alliance; Mercadolibre ( (MELI) - Get MercadoLibre Inc. Report); Siemens AG; and BMW Group.
All of these firms are in the process of migrating analog businesses to digital. In the case of ViacomCBS this transition entails moving 425 linear broadcast channels and 40 media centers to the cloud. The digital transformation of these outlets will make it easier for ViacomCBS licensing partners to access content. And because all of the data will be digital, content can be efficiently streamed to any device with an internet connection, bypassing cable providers altogether.
When a business lives in the cloud it is freed from the shackles of middling businesses. ViacomCBS managers are anxious to use AWS to spin up new channels faster, then analyze and monetize all of the data created in real-time.
The global market for cloud computing services is predicted to reach $236 billion in 2020, according to Gartner, an IT research company. Analysts predict the total addressable market will reach a whopping $355 billion by 2022.
The cloud is the gateway to most digital transformations and enterprises are moving full steam ahead, creating new business models along the way.
Amazon shares trade at 74.3 forward earnings and 4.9x sales. The market capitalization has swollen to $1.7 trillion.
Based on the potential size of the cloud infrastructure marketplace and the strength of Andy Jassy as a manager, the market cap shares should trade to $4,732 within 24 months, a gain of 40% from the current price of $3,380.