Target And Wal-Mart May Move Away From AWS, Will Amazon Be Affected?

by Trefis Team
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Amazon (NASDAQ:AMZN) has made a high-profile push into the brick-and-mortar retail space with its acquisition of Whole Foods, putting it in direct competition with retail giants such as Target and Wal-Mart. This could potentially impact the other services it provides to these companies. For example, reports suggest that Target is scaling back its use of Amazon Web Services (AWS), and the company is likely to transfer its cloud business to Microsoft. Additionally, Wal-Mart recently announced its partnership with Google to offer its products for voice shopping via Google’s assistant in a move to counter Amazon’s voice assistant Alexa. Reports also suggest that Wal-Mart is building its own cloud based data centers, which would eventually eliminate the need for Amazon Web Services. While losing a few customers should not significantly impact Amazon, as AWS has more than a million active customers, Amazon does need to be careful to ensure that its all-around growth does not impact its most profitable segment. Outside of the grocery space, Netflix is a very prominent customer of AWS, and Amazon is now a major competitor to Netflix’s streaming service. While companies may not view using a competitor’s services for their business needs as a major issue, some of Amazon’s competitors seem to be looking elsewhere for similar services. This is going to lead to a balancing act of sorts for Amazon, as retaining and growing AWS’s customer base is crucial given that it is Amazon’s most profitable business.

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According to our estimates, in 2017 AWS will account for nearly 10% of Amazon’s total revenues and around 35% of the company’s total EBITDA (earnings before interest, taxes, depreciation and amortization).

 

 

Towards the end of our forecast period, we expect AWS’s contribution to Amazon’s total EBITDA to be around 60%. AWS is a key profitability driver for Amazon; the segment currently operates at an EBITDA margin of around 36%, and we expect the margin to reach nearly 50% by the end of our forecast period.

 

To put this number into perspective, the EBITDA margin of Amazon’s e-commerce division (electronics and general merchandise) is around 8%, and we do not expect any significant growth in the figure going forward.

AWS is Amazon’s most valuable segment, and that is likely to remain the case for the foreseeable future. While expansion into various other businesses can drive growth for the company, this growth might not be as lucrative if it comes at the cost of loss of business for AWS. With that said, most of AWS’s major customers are not competitors, or companies that are threatened by Amazon’s business expansion. Accordingly, we do not expect that Wal-Mart and Target’s efforts to move away from AWS will impact Amazon significantly. Still, the company would be wise to ensure that its expansion does not come at the cost of too many prominent AWS clients.

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