AWS has grown at a faster rate than the rest of Amazon, all whilst generating substantially higher margins.
In recent years, AWS has come under intense competition from the likes of Alphabet's Google Cloud and Microsoft’s Azure.
Despite this, AWS is still the clear industry leader and has a huge runway ahead.
But can investors base their Amazon investing thesis purely on AWS?
Investment Thesis
I have always watched Amazon.com, Inc. (NASDAQ:AMZN) from the sidelines, but I couldn't help but dig more into its AWS division. After researching it further, I believe that AWS should be the cornerstone of any investment thesis in Amazon right now: it is industry-leading, boasts impressive margins, is the fastest growing segment of Amazon, and, oh, the new CEO started up the AWS division back in 2006.
All this points to AWS becoming the main story for Amazon investors over the upcoming decade, and I think it's pretty clear why.
Business Overview
Amazon is a global player in, well, a lot of different things. The company is best known for its ecommerce marketplace and logistics network, and in particular the Amazon Prime subscription which gives members access to next-day (or even same-day) delivery, access to the Prime Video streaming service, and other benefits depending on your region.
But Amazon is so much more than just its marketplace; in fact, the below graphic quite accurately states that Amazon is at war with everyone.
The company has one of the broadest offerings out there, and has a presence in a multitude of different industries, including video game streaming, music, wallets & payments, smart speakers, and many, many more. In truth, all of these offerings can make Amazon a difficult business to analyze in terms of a potential investment, so my approach is this - assume that the smaller parts of the business are potential future opportunities, but focus on the core offerings that have been successful.
Enter Amazon Web Services
Launched in 2006, AWS is Amazon's industry-leading cloud storage offering. It powers hundreds of thousands of businesses in 190 countries across the globe, with cloud-based solutions that include application hosting, website hosting, enterprise IT application hosting, backup and storage, content delivery, and database solutions - AWS does it all. It has also been Amazon's fastest growing operating segment over the past 5 years, and now makes up 15% of Amazon's revenue. In fact, the only year it wasn't the fastest growing segment was in 2020, when everyone was shopping for everything on Amazon due to lockdowns.
So, let's dive into why AWS should be the backbone of any investment thesis for Amazon.
The Power of AWS
As I mentioned, AWS was formed way back in 2006 when cloud computing was in its infancy. Honestly, I'm not too sure what compelled this e-commerce company to think "you know what would be cool? Cloud hosting," but I'm sure they're glad they did. This has been led since inception by now-CEO Andy Jassy; for me, this is a sign of the future direction of Amazon's business and the increased importance of AWS.
To underscore exactly how much of an impact the growth of AWS should have on Amazon's overall financial performance, I'll use a couple of charts. First, let's take a look at how much of Amazon's revenue is driven by AWS.
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