Amazon’s Acquisition Spree Should Strengthen Its Web Services Business

Amazon (NASDAQ:AMZN) recently announced that it is acquiring Italian software as a service (SaaS) company NICE, which develops products to help customers optimize and centralize their high performance computing (HPC) and visualization workloads. ^[1] In September last year, Amazon had acquired Elemental Technologies, a backend mobile video service for $500 million, to strengthen the cloud infrastructure services offered by its web services division. ^[2]  According to our estimates, Amazon Web Services accounts for nearly 30% of its valuation and is the most profitable division for the company. Strategic acquisitions to strengthen the offerings of this division are instrumental to attract and retain clients, driving revenues and positively impacting the valuation of the company. Ericsson recently announced a global business, technology and services alliance with Amazon Web Services to accelerate cloud transformation for telecom service providers. ^[3] We believe this should boost revenues for AWS, and act a catalyst for growth of its telcom cloud services business, given the large customer base of Ericsson.

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NICE Can Provide Intellectual Property,  Access To European Clients

Although NICE is a niche company, one of its offerings, the Desktop Cloud Visualization (DCV) software, provides 3D developers and game designers access to work remotely from any kind of device.  This software will allow Amazon to enhance its offerings for high CPU performance requirement consumers such as 3D developers.  Apart from this intellectual property,  Amazon will also get access to NICE’s European clients, which has customers in industries ranging from aerospace to energy and utilities. NICE boasts of clients such as Airbus, Toyota, Yale University and Chevron among others. ^[4]  According to Constellation Research, AWS stands to gain a lot from this deal and the intellectual property acquired has the capability to boost the whole Amazon platform through certain fresh functionality. ^[5]

Ericsson Partnership Can Boost Revenues

Ericsson stated that it is working with AWS to help telecom service providers to seize new opportunities, such as IoT and big data analytics, so as to leverage the latest technologies to improve productivity and efficiency. With its partnership with AWS, Ericsson hopes to drive the convergence of mobile infrastructure and the cloud and give application developers and service providers new capabilities that accelerate innovation. ^[3]  Ericsson is creating a global team of experts focused on the AWS cloud and it is opening cloud innovation centers with customers.  We believe this partnership will provide a boost to Amazon Web Services’ revenues as Ericsson’s customers adapt to this offering. Under the partnership, Ericsson also plans to use AWS services and expertise to develop solutions enabling service providers to build new capabilities and introduce attractive new cloud-related offerings. Telestra will be the first customer of the AWS-Ericsson partnership. We believe that as the telecom gear market moves towards software-defined networking (SDN) and software-defined data centers, the AWS-Ericsson partnership will have a competitive advantage given Ericsson’s  top quality hardware and network security and Amazon’s expertise in public cloud services.

We expect Amazon’s revenues from its Web Services division to increase significantly from $11 billion in 2016 to around $ 40 billion by the end of our forecast period.

While the company’s general merchandize division, which accounts for more than 50% of its valuation as per our estimates, operates at an EBITDA margin of around 11%, the web services division is more profitable with an EBITDA margin of around 30%. We expect Amazon to maintain this margin and grow it moderately to around 32% by the end of our forecast period.

Amazon Web Services is a crucial division for the company, since it is the major source of its profitability. Remaining ahead of competition through constant innovation and service enhancements is the key for the success of this division.  We believe that, AWS revenues should see strong growth in future as the company continues strategic acquisitions strengthen its offering and partners with key players to expand its customer base.

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1. Amazon Web Services To Acquire NICE, AWS Official Blog, February 2016 [↩]
2. Amazon Acquires Elemental Technologies For A Reported $ 500 Million In Cash, Tech Crunch, September 2015 [↩]
3. Ericsson announces plans to form global alliance with Amazon Web Services, Company News Release, February 22, 2016 [↩] [↩]
4. NICE Website [↩]
5. Amazon Inc., Acquires NICE In A Strategic Move, Market Exclusive, February 2016 [↩]