Amazon.com Inc.’s (AMZN) third-quarter earnings proved without a doubt the competition is still in no position to dent its lead in the infrastructure as a service (IaaS) market. Amazon took a huge lead in the IaaS segment when it embarked on the commercial cloud computing route in 2006, way before its current crop of tech competitors joined the race.
Many thought the entrance of Alphabet's (GOOG) Google and Oracle (ORCL) to the cloud computing race was certainly going to end Amazon’s dominance in the market. It has been more than two years since these companies took serious strides toward improving their respective Iaas offerings, but Amazon keeps expanding.
During the third quarter, Amazon Web Services reported revenue of $4.584 billion, growing 42% from $3.231 billion last year.
According to third-quarter data from Synergy Research Group:
“The huge cloud market keeps on growing by over 40% per year while Amazon Web Services (AWS) is still managing to nudge its market share upwards, despite increasingly intense competition. Microsoft (MSFT), Google and Alibaba (BABA) are all growing their revenues much more rapidly than Amazon and they continue to gain market share, but the reality is that in this market Amazon remains bigger than its next five largest competitors combined.“
The biggest indicator AWS remains unharmed by the competition is its strong operating margins. If the market was getting increasingly tight, and adding the next customer was becoming more difficult, it is bound to show up in the operating margin numbers simply because the company would have to spend more to grow its market share.
But the operating margin for the quarter came in at 25.5%, better than the 23.3% AWS reported in the second quarter, but 1.1% lower than what it reported last year. The strong operating numbers indicate Amazon has plenty of pricing power to play around with, which will allow AWS to continue the current double-digit growth for a bit longer.
Why is this important to Amazon investors?
The high margin nature of the cloud business brings a lot of cash flow into Amazon’s coffers. During the third quarter of last year, operating income from AWS was $861 million. This has now increased to $1.171 billion. Amazon will be able to utilize this predictable cash flow to fund many of its ambitious expansion projects without worrying about bottom-line results.
Disclosure: I have no positions in the stock mentioned and no intentions of initiating a position in the next 72 hours.
