The trick for Amazon in its earnings report Thursday will be to look good -- but not too good.
Amazon.com Inc. (Nasdaq: AMZN) plans in its quarterly earnings report Thursday to reveal financial performance for its AWS cloud platform for the first time. Previously, Amazon included its AWS results in the category "North America Other" business.
In revealing AWS performance, Amazon needs to be cautious: AWS needs to perform well, but if it performs too well it will make Amazon's mainstay retail business look weak. And that'll drive Amazon's stock price down, analysts say.
"AWS's profitability will be the key data point," said Carlos Kirjner, senior analyst for Alliance Bernstein, in a report emailed to Light Reading. "In brief, if AWS turned out to already be quite profitable, this would have a negative implication for the profitability of the much larger retail business. It follows that the more AWS is currently losing, the better the news for retail and, we believe, for the stock."
Alliance Bernstein believes AWS's GAAP EBIT margin, including stock-based compensation, is "highly likely" -5% to -10%, although it's hard to tell given lack of visibility on staff count and other issues.
Kirjner estimated AWS generated $4.5 billion in 2014 sales, which will grow to $7.3 billion this year, according to Dan Frommer, writing at The Quartz. Cowen and Company estimates 2015 AWS revenue of $5.9 billion, and JPMorgan analyst Doug Anmuth estimates 2016 revenue at $8.9 billion.
Overall, analysts estimate Amazon will report revenue of $22.39 billion in the quarter, up 13.4% year-on-year from $19.74 billion.
Amazon is the top public cloud platform, with 50% market share. Rackspace trails by a long stretch, with 8% market share, followed by Microsoft Corp. (Nasdaq: MSFT)(6%), Verizon Communications Inc. (NYSE: VZ) and IBM Corp. (NYSE: IBM) (3% each). Other vendors combined have 30% market share, says The Quartz.
AWS is also the cloud sector's price leader, with the lowest prices, said analyst Mark Mahaney, RBC managing director, in a report emailed to Light Reading. Pricing actions over the last three months among Amazon and other major cloud providers have been "tame," Mahaney says. That contrasts with "very steep industry price cuts" in the first half of 2014, which slowed down North America Other revenue growth in the second quarter.
While Amazon hasn't been cutting pricing in 2015, it hasn't been quiet either. This month, it introduced Machine Learning as a service, along with virtual desktop management tools. (See Amazon Intros Machine Learning as a Service.)
Low pricing is key to Amazon's appeal. AWS gained market dominance by catering to the low end. Back at its founding in 2004, while competitors aimed for top executives in enterprise businesses, Amazon went after developers, who were more forgiving of glitches and willing to experiment. Meanwhile, CIOs were afraid to even try cloud computing, writes Jack Clark and Ashlee Vance in a brief history of AWS on Bloomberg.
Now, Amazon must lure those same big customers, who are adopting cloud rapidly, but are still timorous.
Why is Amazon breaking out the numbers now? Tom Szkutak, Amazon senior vice president and CFO, said in the company's January earnings call that the business is growing fast enough to make it the right time to do so.
But there may be another reason. Amazon may be planning to spin out AWS, which is "a completely different beast than Amazon's retail business, with different resources and expensive equipment," writes Rachel Lerman at the Puget Sound Business Journal.
Amazon is a company that traditional service providers need to watch. Its cloud platform is both a competitor to and partner with service providers, who sell enterprises on interconnections with AWS and other cloud providers. Likewise, Amazon's media streaming services drive demand for consumer broadband and compete with cable and carrier video offerings.