HPC in the Cloud: Amazon Web Services Worth How Much?

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January 08, 2013

Amazon Web Services Worth How Much?

Tiffany Trader

Market prognosticators have been hesitant to recommend Amazon, often concluding that the stock was overvalued. Perhaps this is not surprising considering a price to earnings ratio of 3569.50 over the last four quarters and the fact that the company was $274 million in the red last quarter.

Still the cloud side of the business keeps analysts guessing. After all Amazon Web Services, as the world's largest utility computing vendor, is synonymous with cloud. And now the company is showing even more potential as it moves from startup enabler to enterprise solution provider with services such as Redshift, the new data warehousing product taking aim at HP, Oracle and IBM.

So is Amazon's cloud business another low-margin activity like online bookselling or could margins be as high as, say, 50% – a figure that has been bandied about "off the record"? Amazon isn't saying. The company does not provide a breakout of its cloud business earnings, but that does not stop analyst speculation.

Australian research firm Macquarie Capital estimates that as a stand-alone business, AWS would be worth $19-$30 billion or $41-$66 a share. The figure is based on a 5-8x multiple of Macquarie's 2013 AWS revenue estimate of $3.8 billion. Macquarie further predicts that AWS will generate $6.2 billion in 2014 and $8.8 billion in 2015.

According to lead analyst Benjamin Schachter, the total cloud market is set to reach $71 billion in 2015 with AWS potentially capturing $38 billion, or 53 percent, of the addressable market.

Big data is thought to be a significant driver behind the bullish AWS forecasts, an opinion shared by Joyent CTO Jason Hoffman, who notes that many companies are opting to use the cloud, and by extension AWS, to handle their big data analysis. Hoffman is also part of the camp that believes Amazon's upper cloud margins are in the neighborhood of 40-50%.

The Macquarie report is not the only predictor of Amazon prosperity. On Monday, Morgan Stanley analyst Scott Devitt improved his rating of the stock, setting a price estimate for Amazon of $325 a share. The same day, the stock reached a record share price, hitting a high of $269.30, and closing at $268.51.

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Discussion

There are 2 discussion items posted.

Macquarie Capital
Submitted by John S Wolter on Jan 9, 2013 @ 9:55 AM EST

Who is Macquarie Capital and why should we trust anything they report. How paid for the report? Did anyone there take Journalism 1?

Post #1

the 50% number (and the previous question)
Submitted by sleinen on Jan 9, 2013 @ 10:50 AM EST

You mention the commonly heard estimate of the margin of the AWS side of Amazon's business:

50% – a figure that has been bandied about "off the record"

The on-record source for this number is probably a report by Brian Pitz and Brian Fitzgerald, two financial analysts specialized in Internet-related business, published in August 2010 by UBS' investment research division, where they worked at the time. The original report may well not be available on the Web, so let me refer to one of the many early citations[1].

Of course John S Wolter's question above - "why should we trust anything they report?" - applies here, too. Although these "analyst reports" are supposed to be neutral and objective and in the interest of the general audience of potential investors, one could assume all kinds of incentives to steer projections one way or another. I guess one would have to look at the original reports to judge their methodological merits. But this is a different business than science!

Both Macquarie and UBS seem relatively well known in the investment world, for whatever that's worth.

[1] http://gigaom.com/2010/08/11/amazon-web-services-revenues/

Post #2

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