Amazon’s AWS Drives Profit Growth, Eclipsing E-commerce Gains
Amazon (NASDAQ: AMZN) has dominated the e-commerce sector, but increasing focus on its cloud computing branch reveals a stronger investment thesis. With modest growth in its e-commerce business, the investment narrative is shifting toward Amazon Web Services (AWS), which displays robust growth and profitability.
AWS Contributes Significantly to Amazon’s Profits
As Amazon matures, investors prioritize profitability over sheer growth. AWS provides both: in Q1, the North American segment saw sales rise by 8% year-over-year, yielding a 6.3% operating margin. In contrast, AWS revenues increased by 17%, showcasing a 39% operating margin.
While North American sales represented 60% of total revenue in Q1, AWS accounted for 19%. Despite this, AWS contributed 63% of Amazon’s operating profits, highlighting its pivotal role in the company’s overall success. As AWS thrives, it becomes clear that future performance hinges on this segment, overshadowing traditional commerce divisions, which remain relevant.
Massive Growth Ahead for Cloud Computing
Fortunately for investors, the cloud computing industry is poised for significant growth. AWS benefits from its established market leadership as the first major player in the cloud space. Two primary trends are fueling this growth: the shift to cloud infrastructure and the surge in AI workloads.
Many businesses still rely on on-premises computing and storage, but the shift to cloud solutions offers cost efficiency, alleviating the need for expensive infrastructure. With an internet connection, companies can leverage cloud-hosted resources. This transition is ongoing and is expected to last over the next decade.
AI’s rapid advancement is also a major growth catalyst for AWS. Companies eager to develop proprietary AI models often lack the necessary computing power. Instead of investing in costly servers, they prefer to rent computing capacity from providers like AWS. Thus, AWS emerges as a beneficiary of the ongoing AI arms race.
According to Grand View Research, the cloud computing market is projected to grow from approximately $750 billion in 2024 to $2.3 trillion by 2030. This anticipated growth not only spans AWS but extends to various segments of cloud computing.
As AWS continues to lead Amazon’s strategy, the focus for investors should shift towards operating profit growth instead of revenue growth since AWS does not significantly contribute to overall revenue. This perspective is essential because operating profit growth has been consistent and strong.
AMZN Operating Revenue (Quarterly YoY Growth) data by YCharts
Though growth in operating income has slowed somewhat, it remains in double digits. This consistency boosts confidence in Amazon’s potential stock performance moving forward, suggesting it is a valuable buying opportunity.
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This moment offers you a chance to invest in promising stocks before prices rise further.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Keithen Drury has positions in Amazon. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.
The views expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
