Amazon Q1 15A– Silver lining

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Amazon Web Services outshines a dull earnings report

• Amazon Web Services (AWS) was the bright spot in a set of results that came pretty much in line with expectations.
• Revenues / EPS were $22.74bn / LOSS $0.12 compared to forecasts of $22.4bn / LOSS $0.11.
• Guidance was weak with revenues / EBIT expected at $20.6bn-$22.8bn ($21.7bn) / LOSS $500m – $50m (LOSS $225m) compared to estimates of $22.1bn / LOSS $15m.
• However, Amazon revealed that its Cloud business, Amazon Web Services (AWS) is much bigger and more profitable than many had expected.
• In Q1 15A AWS grew revenues 49% YoY to $1.6bn and reported operating margins of 16.9% which is far ahead of what most commentators had assumed.
• By contrast Microsoft’s Azure business is currently at $1.1bn in sales but is growing at 114% and I estimate that gross margins are around 40%.
• I think that most commentators had assumed that AWS was roughly the same size as Azure and very unprofitable.
• This surprise has caused many to meaningfully increase their valuations of this part of Amazon.
• This report shows that Amazon is comfortably the leader in the public cloud but it also shows that outside of AWS nothing else has changed.
• Amazon is still investing heavily in growing its empire but there is no sign that these investments are being made with any particular strategy in mind.
• Instead they continue to feel like a random series of experiments with Amazon throwing mud at the wall to see what sticks.
• Unfortunately, nothing is sticking and this is because Amazon still seems to have no real understanding of the ecosystem.
• It has a range of assets such as Amazon Prime, Kindle, Twitch, Maps and so on but all of them are independent from one another.
• In order to be a coherent, easy to use and fun ecosystem, Amazon needs to integrate these offerings together into something where users are going to want to spend their Digital Lives.
• Furthermore, Amazon needs to split its free shipping off from its ecosystem as this creates a $99 per year barrier to joining the ecosystem.
• To me the fact that it has not done this is evidence that still has no understanding of it is trying to achieve and until it does it is likely to continue wasting money on experiments that yield no results.
• Amazon remains very far from the top of my list of places to be in the digital mobile ecosystem.