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Amazon has created what is arguably one of the world’s best growth businesses.
Thomas Samson / AFP via Getty Images
Amazon
Web Services is possibly the most valuable business on Earth.
And the lowest price.
Clearly, the optimistic view of AWS’ long-term potential is not reflected in the current valuation for
Amazon.com
shares (ticker: AMZN), are down 35% so far this year and more than 40% since their November peak. Now valued at around $1.1 trillion, Amazon stock has taken a hit. by a combination of factors that go beyond general market volatility.
The company’s e-commerce business, which boomed during the darkest months of the pandemic, has fallen short of investor expectations in recent quarters, when some shoppers return to the physical store. Amazon acknowledged it as it built up resources to meet skyrocketing demand during the pandemic, it’s overexpanded logistics infrastructure and its staff, increasing costs. The company continues to face strict regulatory oversight while dealing with the spike in fuel costs and competing with ongoing battles from unions looking to organize Amazon’s workforce.
And yet, within the company’s cloud business, Amazon has created what is arguably one of the world’s best growth businesses — one that’s still in its infancy.
In a 128-page report that lays out the coverage of the cloud sector, analyst Alex Haissl of UK-based research firm Redburn asserts that AWS is worth $3 trillion. He’s not entirely optimistic about
Microsoft
‘S
(MSFT) Azure, but that business is worth $1 trillion anyway, which is about half of Microsoft’s current market capitalization.
In the report, Haissl gives coverage of both Amazon and Microsoft with a Buy rating. He sees limited opportunities for the other two major players in the cloud business, choosing an analytics and data storage company.
Snowflakes
(SNOW) with Neutral rating and database software company
MongoDB
(MDB) with Sell. He set a target price of $270 on Amazon (now $109), $370 on Microsoft (now $260), $125 on Snowflake (recently around $143) and 190 dollars on MongoDB (much lower than its recent $277 price).
In Wednesday’s trading, Amazon was up 1.1%, Microsoft was 1.5% higher, MongoDB was down 0.6% and Snowflake was down 0.5%. The
flat.
The analyst thinks that cloud companies can sustain high growth much longer than the usual Street expectations, pointing out that his estimate for AWS is on average 20% above consensus. in the next 5 years. At some point, Haissl added, Amazon may decide to separate AWS from the rest of the company.
He wrote: “The journey of cloud computing has only just begun, an unbelievable fact after a period of intense development. “The cloud is very complex, which makes it very difficult to get to the bottom of what’s really going on.” He argues that the three main cloud providers — AWS, Azure, and
Alphabet
‘S
(GOOGL) Google Cloud Platform — control the most important cloud service, simply storing customer data in its raw form.
“Modern cloud architectures have central storage, called a ‘data lake,’” he explains. “Above the data lake are many connected services, including databases, data warehouses, big data processing, and machine learning, among others. The architecture is very flexible, and its implementation varies from company to company.”
The analyst reports that Amazon’s data lake service, called S3 (or Simple Storage Service), stores more than 100 trillion data objects — an average of more than 13,000 for every person on the planet . He estimates that S3 alone is already a $1.5 trillion business, equivalent to the current market capitalization of Google’s parent Alphabet. Haissl thinks S3 can generate 40% better annual growth through 2030.
He also points out that all three cloud infrastructure providers offer tools across their data lakes for efficient use of stored information. “The strength of AWS, Azure, and GCP is that they have all the tools that customers want,” he said.
Haissl also found that while AWS, Azure, and GCP appear similar on the surface, there are significant differences. Amazon and Google have their roots in distributed systems, big data applications, and machine learning. Microsoft’s strength is in older technologies, like the company’s SQL server database technology, he said.
For Snowflake and MongoDB, Redburn analysts simply see their opportunities narrower than the Street consensus view, especially as cloud providers control the data lake and provide multiple applications. top use. “Snowflake and MongoDB have their core strength in one area, which limits their ability to build ecosystems. There is an uptrend, but the market may be too optimistic on that,” Haissl wrote. He is also concerned about the massive impact of stock-based compensation on both Snowflake and MongoDB.
“The problem is twofold,” the analyst wrote. “First, looking at valuations and how shareholders are diluted. Second, the broader impact on business structure and costs. In a scenario where stocks stay low for longer, employees may demand higher wages, which has far-reaching effects on the margin potential of the business. “
Write to Eric J. Savitz at eric.savitz@barrons.com
