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The Seattle Wars: Who Will Win the Cloud?

Posted on Friday, Feb 8th 2019

Amazon (NASDAQ: AMZN) recently reported its fourth quarter results that beat analyst estimates. However, AWS, its cloud segment failed to impress analysts.

Amazon’s Financials

Amazon’s fourth quarter revenues grew 20% to $72.4 billion. Net income increased from $1.9 billion or $3.75 per share a year ago to $3 billion or $6.04 per share. Analysts expected earnings of $5.56 per share on revenue of $71.9 billion. Operating income increased to $3.8 billion, compared with $2.1 billion a year ago.

By segment, net product sales increased 8.2% to $44.7 billion and net service sales increased 45% to $27.7 billion.

AWS revenues grew 45% over the year to $7.4 billion, missing estimates of $7.29 billion. AWS generated operating income of $2.1 billion. According to the latest Synergy Research Group report, AWS remains the leader of the public cloud infrastructure space with about 35% market share in Q4. Microsoft is a distant second with 15% share, followed by Google Cloud and IBM Cloud neck to neck at 7%.

Revenue from subscription services like Prime increased 25% to $3.95 billion. Revenue from online stores grew 13% to $39.8 billion while revenue from physical stores, chiefly from its stores from the Whole Foods acquisition, was down 3% to $4.4 billion. Revenue from third party seller services including commission, fulfillment, and shipping fees grew 27% to $13.3 billion.

Other revenue mainly from advertising grew 95% to $3.4 billion. Despite the drastic increase, Amazon still has a long way to go before it catches up with advertising leaders Google and Facebook. Facebook’s Q4 advertising revenues grew 30% over the year to $16.64 and Google’s Q4 advertising revenue grew 20% over the year to $32.64 billion.

Amazon’s international sales grew 15% to $20.8 billion. However, losses narrowed 30% from $919 million to $642 million while North America reported net sales of $44.1 billion, up 18.2% and operating income of $2.2 billion, up 33%.

For the full year 2018, Amazon reported revenue of $232.9 billion, up 31%. Net income increased over three times to $10.1 billion, or $20.14 per share from $3 billion, or $6.15 per share, in 2017. Operating income increased to $12.4 billion from $4.1 billion in 2017.

For the first quarter, Amazon expects sales to grow 10%-18% to between $56 and $60 billion, lower than analyst estimates of $61 billion. Operating income for the quarter is expected to be $2.3-$3.3 billion versus analyst estimates of $2.99 billion.

Amazon’s Initiatives and Worries

Meanwhile, in the online payment space, Amazon has a dismal 4% acceptance rate at non-Amazon retailers while PayPal is accepted as a form of payment at 82% of top retailers. In India, it is taking on rivals Google Pay, PhonePe, and Paytm with a new cash load offer. Customers who add a balance of INR 5,000 ($70) or more in their Amazon Pay wallet can get a maximum cashback benefit of INR 1,000 ($14) whereas users who add a top-up worth INR 100 (~$1.5) can get INR 50 (~$0.75) as cashback.

Another cause for concern is the revised e-commerce policy in India implemented from February. These new rules bar vendors with equity held by the marketplace from selling on the platform. With these new rules, Amazon-owned sellers Cloudtail and Appario have become inactive. Cloudtail and Appario were a critical part of the Amazon ecosystem. They helped small sellers in managing return and order processing. Foolwing the new regulations, Cloudtail and Appario will continue to sell on Amazon’s B2B platform. Amazon does have initiatives like Easy Ship for its small sellers, but there is not much clarity and many are reportedly exiting the marketplace.

Amazon’s Acquisitions

Amazon spent over $2 billion on acquisitions in 2018 and ended the year with a cash balance of $32.2 billion. As per its SEC filing, Amazon spent $1.6 billion on acquisitions in 2018. In April 2018, it acquired connected doorbell maker Ring for $839 million. This was its second big acquisition since the $13.6 billion it spent on Whole Foods in 2017. Ring’s doorbells came equipped with audio and video equipment that could connect with other voice-enabled smart-home devices such as Alexa. Ring had raised $209.2 million in funding.

In September 2018, Amazon acquired online pharmacy PillPack for $753 million. PillPack helped consumers manage medications by sorting them into doses and refilling them. Launched in 2013, it was licensed to ship prescriptions in 49 states. It was expected to cross $100 million in revenue in 2017. It had raised $118 million in funding.

Early this year, Amazon announced its plans to acquire Israel-based cloud backup and disaster recovery company CloudEndure for an estimated $200 million. CloudEndure provides disaster recovering and data migration services across AWS, Google Cloud Platform (GCP), Microsoft Azure, and VMware and was an AWS Advanced Technology Partner since 2016. It was founded in 2012 and had raised $31.2 million in funding.

Amazon recently unveiled its urban delivery robot called Scout that was apparently built after it acquired  an urban delivery robot startup called Dispatch in 2017 for its IP and talent. Founded in 2015, Dispatch had raised $2 million in funding.

While Amazon is expanding its e-commerce and advertising business, it also needs to maintain its lead in its cloud business. The CloudEndure acquisition can be seen as one such move to protect its turf from Microsoft and Google. Will we be seeing more such moves?

Amazon’s stock touched a record high of $2050.50 in September and crossed $1 trillion in market cap but its stock is currently trading at $1614.37 with a market cap of $793 billion. Its 52-week low is $1,265.93.

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