Tech behemoth Amazon is most widely known for its online e-commerce business. However, Amazon’s cloud services business Amazon Web Services is a massively important segment for the company. Amazon derives over 40% of its total value from Amazon Web Services, per Trefis estimates, despite generating only around 10% of net revenues in 2017. This is largely due to the fact that AWS is a high-margin business (25% reported operating profit margin) while non-AWS business streams operate at thin margins. Amazon’s North America operating profit margins stand at around 2-3%, while Amazon International has operated at a loss over the last few years.
Amazon has reported strong growth in AWS revenues in recent years, with revenues surging from just under $2 billion to over $17 billion from 2012 through 2017. Going forward, we expect AWS revenues to continue to grow rapidly in the coming years. We expect the company to end the current year at around $25 billion in revenues from AWS. We further expect this figure to increase to over $44 billion by the end of the decade. We forecast the company’s net revenues to increase from $178 billion in 2017 to $235 billion this year. We further expect this figure to increase to over $340 billion by the end of the decade. Accordingly, AWS is expected to contribute around 16% of Amazon’s overall revenue growth in the same period. We have summarized our expectations for segment growth through 2019 and 2020 on an interactive dashboard on Amazon Web Services Revenue. Below we take a look at the key revenue drivers for this segment.
Factors Driving Segment Growth
Amazon categorizes its total revenues into six key segments that include online store sales, physical stores, Amazon Web Services, subscription services, third-party seller services and other services. AWS revenues include sales of compute, storage, database, and other service offerings that form a part of global Infrastructure-as-a-Service (IaaS), Platform-as-a-Service (PaaS) and hosted private cloud markets. Amazon’s AWS customers include startups, enterprises, government agencies and academic institutions.
It is interesting to note that Amazon has been a clear leader in the specific market domains in which it operates (primarily IaaS, PaaS and hosted private cloud). Over the last three years, the company’s market share in its addressable market has remained in the 32-33% range, according to a report by Synergy Report Group. While Amazon’s addressable market market grew from $23.5 billion in 2015 to $54 billion in 2017, AWS revenues surged from $7.9 in billion to $17.4 billion in the same period. The growth was driven by a higher demand for offerings, growth in resulting customer usage as well as cost structure productivity due to the scalability of Amazon’s cloud offerings. While AWS’ initial fixed cost for Amazon was very high, it was justified because of massive economies of scale.
In the current year thus far, AWS has continued its growth spree, with revenues increasing nearly 50% on a y-o-y basis to $11.5 billion through the first half of the year. For this year, we expect Amazon’s share in the combined IaaS, PaaS and hosted private cloud market to stand at around 32%, with the market size expected to be around $76 billion. Accordingly, we expect AWS revenues to be around $24 billion for the year.
Over the next couple of years, Amazon’s addressable market is expected to increase at over 30% to over $135 billion. We forecast Amazon’s market share to gradually decline to less than 31% in the coming years. As a result, AWS revenues are expected to increase to $43-44 billion by the end of the decade. The Trefis price estimate for Amazon’s stock stands at $1,650, which implies a valuation of $830 billion. Our estimate is slightly below the current market price, which has fallen by over 12-13% this month after trading at an all-time high of over $2,000 through September.
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