The past few weeks have been difficult for Amazon investors. After the company announced slowing revenue growth and weaker-than-expected financial guidance, the stock price plummeted.
Although investors were likely troubled by Amazon’s poor quarterly results, they may have missed one of the most important figures in the company’s filings with the Securities and Exchange Commission (SEC). That figure is $104.3 billion of future contracted revenue from their AWS vertical, and it’s something shareholders should scrutinize.
Why should investors care about AWS?
AWS is Amazon’s cloud computing business. It’s the company’s most profitable segment, accounting for $17.6 billion in operating income this year. And while its growth has slowed in recent quarters, it’s still a key driver of Amazon’s overall business. AWS revenue grew 36% year-over-year in the first quarter to $18.4 billion.
AWS is so important to Amazon because it has a much higher margin than the company’s e-commerce business. AWS’s operating margin is 30% this year, while Amazon’s other ventures and e-commerce branch bring the overall operating margin down to 3.89%.
This difference in margins is why some investors view Amazon as a cloud company first and an e-commerce company second. And it’s also why AWS is so important to the company’s future growth.
What slowing revenue growth means for the company
Like many other tech companies, Amazon’s revenue growth has slowed in recent quarters. The third quarter’s net income of $2.87 billion was a significant drop from the $3.16 billion in the same quarter of the previous year.
There are a few reasons for this slowdown. First, Amazon’s e-commerce business is maturing. The company has been in business for over two decades and has a significant market share in many developed countries. As a result, it’s becoming harder for Amazon to achieve the same level of growth it did in its early days.
Second, the overall downturn in the global economy has also weighed on Amazon’s revenue growth. Consumers are spending less money, and businesses are investing less in technology, which has led to slower growth for many tech companies, including Amazon.
Third, Amazon’s investments in new businesses like cloud computing, streaming video, and grocery delivery weigh on its bottom line. These investments are essential for the company’s long-term growth, but they’re expensive in the short term.
Finally, it’s worth noting that the slowdown in Amazon’s revenue growth is relative. The company is still growing at a breakneck pace, and it remains one of the fastest-growing companies in the world.
Why is the $104.3 billion figure important to shareholders?
The $104.3 billion backlog in revenue from AWS is massive. To put this figure into perspective, AWS generated $58.7 billion in the first three quarters of 2022. If we annualize this number, it would mean that AWS is currently on track to generate $78 billion in revenue for the year. This means the $104.3 billion backlog equals 133% of AWS’s net sales for a single year.
This is an incredible figure, underscoring AWS’s importance to Amazon’s future growth. Investors should keep an eye on this number in the coming quarters to see if Amazon can continue to grow its cloud business at such a rapid pace.
Analysts have concerns about Amazon’s future
While Amazon remains a solid company, analysts have some concerns about its future. These include:
- The overall slowdown in the global economy: With e-commerce and cloud services accounting for a large portion of Amazon’s revenue, a downturn in the global economy could negatively impact the company. Many of AWS’s current customers are opting for shorter-term contracts, which could lead to lower revenue growth for Amazon in the future.
- The potential for regulation: As Amazon becomes more dominant in the e-commerce and cloud services markets, there is a risk that regulators will step in and attempt to break up the company or impose restrictions on its operations. This would be a negative for Amazon’s shareholders.
- The company’s heavy investment in new businesses: Amazon invests heavily in new industries like streaming video, cloud computing, and grocery delivery. These are all critical investments for the company’s long-term growth, but they’re expensive in the short term. This could weigh on Amazon’s bottom line in the future.
- Competition from other big tech companies: Amazon faces stiff competition from other big tech companies like Google and Microsoft. These companies also invest heavily in cloud computing and streaming video, posing a serious threat to Amazon’s business.
Will Amazon continue to be successful?
Many experts believe that Amazon will continue to be successful in the years to come because of its substantial competitive advantages. These include:
- A vast and growing ecosystem: Amazon has built an extensive ecosystem of products and services that consumers rely on. This gives the company a substantial competitive advantage.
- A strong brand: Amazon is one of the world’s most trusted and well-known brands.
- A massive customer base: Amazon has millions of customers around the world. This gives it a big advantage in marketing and selling new products and services.
- A proven business model: Amazon has a proven business model that is highly profitable. This gives investors confidence in the company’s prospects.
- A deep understanding of customers: Amazon deeply understands its customers and what they want. This allows it to continually innovate and offer new products and services that customers love.
These are just some of the reasons why experts believe Amazon will continue to be successful in the years to come. The company’s competitive advantages are difficult to match, giving it a strong market position.
Is now a good time to buy shares in Amazon?
If you’re looking for a long-term investment, Amazon may be a good option. The company has strong competitive advantages and is well-positioned for continued growth. However, if you’re looking for a shorter-term investment, Amazon may still face some challenges in the near future. When we ran the numbers, Amazon had upside to $117 per share based on an evaluation of cash flows discounted to the present day.