Amazon’s Cloud Is Growing So Fast It’s Scaring Shareholders

http://www.wired.com/2014/07/amazons_cloud/

by cryptoz • 12 years ago

66 43 12 years ago

wired.com

BrainInAJar• 12 years ago

that's a little misleading. From the article:

Yesterday Amazon said that while its cloud business grew by 90 percent last year, it was significantly less profitable.

Investors aren't scared because AWS is growing too fast, they're scared because profits aren't growing along with it

tootie• 12 years ago

Misleading headline. Investors are scared of Amazon's persistent lack of profits despite their hugely popular offerings.

adventured6• 12 years ago

Exactly. Investors are afraid Amazon has found another low profit business to dominate. If they can't yield even a low margin profit at $80 billion in sales - eg 3% Walmart style, or $2.x billion in net income - why would anyone believe they will at $160 billion in sales. Not to mention they're a 20 year old, unprofitable business.

Touche• 12 years ago

Not to mention they're a 20 year old, unprofitable business.

But they've only been unprofitable the last hand few of years. Before that they were quite profitable. Amazon's pursuit of businesses with high R&D costs is the reason for their current lack of profitability.

rodgerd• 12 years ago

And a lot of their profit is essentially reliant on competing by dodging taxes - their margin advantage to the consumer could, in many markets, simply disappear with the closure of a few sales or corporate tax loopholes.

jgreen10• 12 years ago

The Amazon profitability figures are a bit misleading. Amazon adds a very big revenue generating chunk of company every year that has enormous value. That's effectively their profit. One day, they could decide to keep money in their pockets, instead of investing it, but share holders would only demand that if they thought they could do a better job at investing than Amazon. The market has had enough confidence in AMZN for it to go up by 275% in the past 5 years, compared to 125% for the NASDAQ. It's not clear whether this shows that Jeff Bezos is a better investor than the market, or that the market currently believes that he is and this will eventually correct itself, but momentum definitely seems in Bezos' favour.

opendais2• 12 years ago

Yes, they are going to have to raise their margins at some point and there is no guarantee it can be done without costing them more business than they can afford.

AWS is already pricey for what it offers. Raising the margin on Amazon.com's sales requires squeezing suppliers more and raising prices and I'm not sure that outcome will be profitable either.

ekianjo• 12 years ago

Amazon's persistent lack of profits

This has been addressed several times already. Amazon is effectively making profits on several on its key businesses but is effectively reinvesting most of its profits into new infrastructure, distribution centers and new services. The day Amazon decreases that investment ratio, profits will significantly increase. In other words, Amazon is far from being in the red. They are just massively investing.

int19h• 12 years ago

Some people want to see healthy EPS growth, and as you point out some patient investors are willing to buy the "reinvesting in accelerated growth" thesis.

But everyone is getting tired of AMZN's lack of transparency. Increasingly, buying AMZN is akin to buying the "Bezos is the next Jobs" meme on faith.

http://seekingalpha.com/article/2343265-amazon-com-bezos-ser...

epa3• 12 years ago

Investments in capital items are shown on an income statement expensed over the life of the asset. Decreases in investment have no impact on increase in profit (only the opposite is true, increase in investment will add a decrease in profit of 1/n of the cost where n is the life of the asset in years).

adventured6• 12 years ago

"After all, if chipmakers deliver more and more transistors every two years, Amazon should be able to do more computing for less."

Pretty bad conclusion by the author, particularly given this is Wired. If chip makers deliver more transistors, customers of AWS will use them all up, Amazon will not be able to just sit on their hands and offer up the same computing at a lower total cost.

autokad• 12 years ago

If amazon charges 10 $ for 10 Ghz, and by mores law the price to deliver 10 Gz is reduced by half, then Amazon should be able to do more computing for less. Without competition and with Moore's law, Amazon can can offer lower prices AND increase its bottom line due.

adventured6• 12 years ago

That assumes customers do not eat all the computation gains. That's an incorrect assumption, cloud customers will always eat all computation gains. Every unit of extra power a customer can get at zero additional cost, they will consume. It's a corollary to Moore's Law, and it's why customers bother to upgrade processors each generation.

In the time Amazon's cost for 10 Ghz went down by half, the demand for processing doubled.

ojbyrne• 12 years ago

"Withou competition" seems like the problem. Competitors are going to get the same advantages from Moore's law, and they've already demonstrated the are exerting pricing pressure on AWS.

djhworld• 12 years ago

Can anyone explain what they mean by this?

"It’s invented and then built a nearly $5 billion cloud computing business catering to fickle software developers"

glibgil• 12 years ago

Amazon built AWS. AWS does $5 billion in business. AWS has the variety and depth of services that software engineers expect.

themartorana• 12 years ago

More importantly, it has managed to replicate the entire hosted rack experience without requiring a company employ staff to manage it. Rackspace is nice but they use OpenStack, which still struggles behind the plethora of networking options and protections AWS has - including VPCs, load balancers, firewalls, subnets both private and public, and so on.

There's very little I can't virtualize in AWS that I might find in a typical rack at a co-lo facility, and in that, AWS has no competitors.

(There are other offerings with varying degrees of awesomeness - Softlayer comes to mind - but bang-for-buck, my company still bets on AWS. My only gripe is I/O and the need for local-SSD-fast disk access for clustered KV database stores, which may finally cause us to start looking elsewhere.)

ak217• 12 years ago

as [AWS] matures to the size of a company like VMware

LOL. VMware has never been able to hold a candle to what AWS is doing. To draw an equivalency between the two is misleading.

The true danger to AWS is not coming from any of their competitors (Azure is a long way from not sucking, and the Google challenge, while serious, only supercharged Amazon's growth).

Their true danger lies in the fact that Amazon doesn't treat their engineering/product employees well enough. The AWS products will suffer from high turnover and poaching if they don't address this.

cwyers• 12 years ago

Azure and Google are good enough in the eyes of a lot of people to compete, and Amazon believes this to be true, otherwise they wouldn't match price cuts the other two make. They have.

The problem for Amazon is that Microsoft and Google don't need to profit on Azure and Google Compute the way Amazon does. Microsoft can sell Azure services at low margin and make the rest of their money selling Visual Studio and MSDN subscriptions and whatever else to developers working on sites hosted on Azure, and selling Office 365 and whatnot to companies shifting their in-house resources towards the cloud. Microsoft sells a lot of complements that mean it can get away with selling services on Azure at close to cost and still make money. Google's in a similar position, in that it has other complements (AdWords, services like Maps, Android, etc.) for developers working on its stack, and it has enterprise products like Google Docs as well. Amazon meanwhile is selling AWS products but no strong complements. So being dragged into a pricewar with Google and Azure means a very real chance that they continue to not make a lot of profit on AWS, even if they beat Microsoft and Google.

adventured6• 12 years ago

How is that not an accurate statement? VMWare did $5.2 billion in sales last year (with a billion in profit to boot), it's definitely comparable in size to AWS.

chatmasta• 12 years ago

I sincerely wonder what percentage of institutional investors have any semblance of a fucking clue what "the cloud" actually stands for, or for that matter, that Amazon is even in the cloud business. I talk to friends in finance all the time who have no idea that Amazon is more than just an e-commerce website. Granted, they do not specialize in tech, and no 22-25 year old analyst is making any real investment decisions, but the general sentiment makes me wonder.

Who are the people responsible for tech sector investing at large investment banks? Do they know anything about the operational details of "the cloud," or is their knowledge limited to marketing gimmicks and enterprise parlance?

The fact is, the technical details of cloud businesses are what differentiate them, and ultimately what sway engineering decision makers one way or the other in terms of choosing an offering. Yet I get the feeling that the investors in these cloud companies have no fucking clue what any of these technical details are.

Wall Street is a joke.

jzwinck• 12 years ago

If you (or someone you know) understands the cloud better than the existing investors and analysts, perhaps you should be trading shares of cloud companies yourself. Of course, if a deep technical understanding of such things does greatly influence long-term market value, you can expect there to be some competition doing the same thing already.

There are undoubtedly less-informed participants in every market...otherwise very few trades would ever occur.

Ovid• 12 years ago

A fairly vacuous article, but here's the takeaway:

The company is taking losses to invest in the future, and Amazon’s 10 percent stock drop today shows that some investors are uncomfortable with that.

While its tough to be sure exactly what motivated that drop, the reasoning sounds accurate. More importantly, it shows a huge part of why public corporations in the US are so broken and may actually be hurting the US's competitiveness.

In a recent study (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1959125) entitled "The Dark Side of Analyst Coverage: The Case of Innovation", the researchers found that publicly traded companies who attract the attention of financial analysts are less innovative. Why? Share prices.

For many in upper management of these companies, their compensation is tied to share prices. Management works hard to keep their share prices high. Further, if share prices drop too much, the Board might decide it's time to start firing their "inefficient" managers. In a worst-case scenario, if a company has value but their share prices continue to drop, they leave themselves vulnerable to a hostile takeover, thus risking everyone's job.

In a publicly traded company, everyone is working together to prop share prices up. How do they do that? Amongst other things, they're much more risk-averse. Taking a risk is a strong signal to the market that you might fail and they reward you with lower share prices. That's why the above paper found that public companies produce fewer patents and of lower value: everyone is so focused on short-term goals that long-term opportunities are at odds with their mandate of maintaining shareholder value.

Curiously, it looks like public corporations can share the same defect that democracy does: people can vote. Sadly, democracies produce mediocre politicians because average voters have average intellect (duh) and can't evaluate brilliant candidates (http://www.livescience.com/18706-people-smart-democracy.html). Rhetoric takes the place of thoughtfulness and we see this with corporations, too.

Frankly, I have no idea how to avoid these dilemmas but pretending they don't exist is surely not good.

eurleif• 12 years ago

When a business first buys into cloud computing, they're likely to compare prices between providers. But I think once most businesses are using a particular provider, they're going to have too much inertia to switch based on a minor difference in price.

Cloud computing is still sort of new. A lot of businesses are still switching from other options, and the cloud industry as a whole is growing rapidly as a result. But that will slow down at some point. That sounds to me like the right time for Amazon to start profiting.

Amazon’s Cloud Is Growing So Fast It’s Scaring Shareholders

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