Web Services To Drive Future Growth For Amazon

Amazon’s (NASDAQ:AMZN) cloud and other web services division contributes only a mere 3% of our valuation for its stock. But this business has a strong growth potential with offerings such as Amazon Elastic Compute Cloud (EC2), which enables scalable deployment of applications for enterprises, and the online retailer’s efforts to boost its other products and services through its web services. The Cloud Player, which allows users to store music on the cloud, and the just launched Amazon Glacier, a cloud service for data archiving and back-up, are a few such examples that highlight Amazon’s effort to expand its web services.

Below, we take a look at the trends which influence the Cloud and Other Web Services division of the company. We currently have  $222 estimate for Amazon, which is around 8% below the market price.

See our complete analysis for Amazon

Betting big on cloud and web services

Amazon Web Services was launched in 2006 with the aim of providing online services for other web sites and client-side applications. Most of these services are back-end and offer functionality that other developers use in their applications. These services are billed based on their usage, however, the usage measurement varies from service to service.

The Amazon Elastic Compute Cloud (EC2) is central to the company’s web services offerings, and it lets the developers rent computing power that they use to run their applications. The EC2 provides re-sizable computing capacity in the cloud, thus enabling easier web-scale computing for the developers. With the time required between identification of the need to expand capacity and actual capacity expansion reduced to minutes, the quick scaling capacity provides great benefits to the enterprise users.

Several users have publicly endorsed this service and prominent among them is NASA’s Jet Propulsion Laboratory. With the users paying only for the capacity they use, the cost effectiveness of the service is an added benefit. This has helped enterprises replace up-front capital infrastructure expenses with low variable costs.

Amazon has been using its cloud and web services to support its other services as well. The recently launched Cloud Player lets users store music selection on the cloud and then stream it on a variety of devices. This enhanced ubiquity gives Amazon the ability to attract further users from rival services like Apple (NASDAQ:AAPL) iTunes.

This week the company launched Amazon Glacier, a secure, reliable and extremely low cost storage service designed for data archiving and backup. It is designed for data that is infrequently accessed, yet important to retain for future reference and for which retrieval times of several hours are suitable. With the prices for storage as low as $0.01 per Gb per month, it can be used by individuals with large data banks as well as by institutional users.

We expect Amazon’s revenues from cloud and web services to jump from $2 billion currently to almost $7 billion by the end of our forecast period.

You can also read about the trends we expect to impact the Electronics and General Merchandise division,  the Books, DVDs and Videos and the Kindle Hardware divisions.

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