Seizing the Cloud Opportunity
Recognizing the increasing digitalization of the world, Amazon’s founder and former CEO, Jeff Bezos, predicted that businesses would require cloud-based tech infrastructure. Today, Amazon Web Services (AWS) provides off-premises cloud services to renowned enterprises like Walt Disney, Verizon, and Autodesk.
AWS offers a range of services, including computing power, data analytics and storage, and security services. From a customer standpoint, migrating IT infrastructure to the cloud generates cost savings, minimizes maintenance and capital expenditures, and enhances flexibility. Executives benefit from the ability to add capabilities from a cloud provider as needed, without committing to large-scale investments.
The global cloud services market is projected to create a massive revenue opportunity of around $1.6 trillion by 2030, according to Grand View Research. As the first mover in the industry, AWS currently dominates with a 32% market share. Microsoft Azure and Alphabet’s Google Cloud follow as the second- and third-place contenders, respectively.
Despite slower growth in recent quarters, AWS remains a formidable player in the market. On the Q3 2023 earnings call, Amazon’s management expressed confidence in increased deal volume and pace, alleviating concerns about ceding market share to competitors.
When analyzing massive tech companies like Amazon, it can be intriguing to gauge the worth of individual segments if they were independent entities in the public markets. In the case of AWS, the figures are mind-boggling.
In the most recent quarter, AWS generated annualized revenue of $92.4 billion, boasting an impressive operating margin of 30%. Applying a price-to-sales (P/S) multiple of six, AWS could be valued at approximately $550 billion.
Comparatively, Amazon’s overall P/S ratio is currently at 2.9. However, AWS exhibits greater growth potential and profitability than the company’s e-commerce operations. Furthermore, AWS is poised to become a leader in artificial intelligence (AI) and empowers customers to develop their generative AI applications using AWS’ computational resources.
Alphabet and Microsoft trade at P/S multiples of 6 and 12.8, respectively, implying that a $550 billion valuation for AWS might be an understatement. In fact, some analysts projected the division to be worth up to $2 trillion.
All indications suggest that Amazon’s business is likely undervalued, even after its shares have surged 83% this year. The dominance of AWS, coupled with its growth potential and profitability, explains why the company’s value merits further recognition.