Potential Rise in Web Service Margins Provides Little Upside to Amazon

Amazon’s (NASDAQ:AMZN) EBITDA margin from its web services, including cloud computing and cloud storage service offerings, has declined from an estimated 6% in 2005 to just over 4% in 2010. We expect a further decline in the coming years due to increasing competition from more established players like Google (NASDAQ:GOOG), Microsoft (NASDAQ:MSFT) and Salesforce.com (NYSE:CRM) in cloud-based offerings. Amazon has also accelerated its international expansion, which will translate into greater marketing expenses and cause a drag on profit margins.

While we estimate Amazon’s cloud computing EBITDA margin will drop below 4% by the end of our forecast period, the Trefis community expects this metric to trend in the opposite direction, predicting an increase towards 5% by the end of our forecast period.

Our price estimate for Amazon stock stands at $182, roughly in line with the current market price.

Growing Competition from Cloud-Computing Majors

The cloud computing market is expected to grow at a faster pace in the coming years, with major players like Google, Microsoft and Salesforce.com getting geared up with increased cloud-based offerings. This means added competition for Amazon in the years ahead from players that already have a stronger presence in the market. Higher competition could force Amazon to reduce the license pricing of the technology infrastructure that it provides to developers.

Expansion into International Markets

Over the last few years, the percent of Amazon’s revenues coming from international markets has increased from 45% in 2007 to 48% in 2009. As Amazon expands into international markets in the future, there will be an increase in marketing expenses as the company positions itself to capture share in new markets. Since emerging markets are price sensitive in nature, Amazon will have to offer cost-effective solutions to attract customers. This could further reduce its margins in the future.

Cloud & Other Web Services Represent Only 3 Percent of Amazon’s Stock Value

We estimate that Amazon’s cloud and other web services operations account for only 3% of the company’s stock value. The Trefis community forecasts that this segment’s operating margin will increase beyond 5% by the end of our forecast period, vs. our expectation for a gradual decline. While this divergence is notable, the numerical impact to our $182 price estimate is limited since this segment only represents an estimated 3% of Amazon’s stock value.

To see the impact of various web service operating profit margin scenarios on Amazon’s stock value, drag the trend line in the modifiable chart above.

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Our complete analysis for Amazon’s stock is here.