Amazon has arguably created one of the world’s top growth companies.
The optimistic view of AWS’s long-term potential is not reflected in the current valuation for Amazon.com stock (ticker: AMZN), down 35% this year and more than 40% since the end of the year—the peak is in November. Now valued at about $1.1 trillion, Amazon stocks have been hurt by a combination of factors far beyond the general slump in the market.
The performance of the company’s e-commerce business, which boomed during the darkest months of the pandemic, has fallen short of investor expectations in recent quarters as some shoppers returned to brick-and-mortar stores. Amazon has admitted it was expanding its logistics infrastructure and staff while expanding resources to respond to rising demand from the pandemic era, driving costs up. The company continues to face intense regulatory scrutiny as it faces spikes in fuel costs and ongoing battles from unions seeking to organize Amazon’s workforce.
And yet, in the company’s cloud business, Amazon has created one of the world’s best growth companies — a company still in its infancy.
In a 128-page report covering the cloud sector, analyst Alex Haissl of UK-based research firm Redburn claims that AWS is worth $3 trillion. He’s not overly optimistic about Microsoft’s (MSFT) Azure but thinks the company is worth $1 trillion, or about half of Microsoft’s current market cap.
Haissl launched coverage on Amazon and Microsoft with purchase ratings in the report. He sees narrower opportunities for two other key players in the cloud business, data warehousing, and analytics company Snowflake (SNOW) with a neutral rating and database software company MongoDB (MDB) with a sale. He set target prices of $270 on Amazon (now $109), $370 on Microsoft (which is currently $260), $125 on Snowflake (recently around $143), and $190 on MongoDB (well below the recent price of $ 277).
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In trading on Wednesday, Amazon was up 1.1%, Microsoft was up 1.5%, MongoDB was down 0.6%, and Snowflake was down 0.5%. The Nasdaq Composite was flat.
The analyst believes cloud companies can sustain high growth for much longer than The Street generally expects, pointing out that his estimates for AWS over the next five years are, on average, 20% above consensus. At some point, Haissl adds, Amazon may separate AWS from the rest of the company.
“The journey of cloud computing has only just begun, a fact that is hard to believe after a period of strong growth,” he writes. “The cloud is complex, making it challenging to get to the bottom of what’s happening.” He argues that the three primary cloud providers – AWS, Azure, and Alphabet’s (GOOGL) Google Cloud Platform – operate the most important cloud service, storing customer data in raw form.
“Modern cloud architectures have centralized storage, also known as ‘data lake’,” he explains. “On top of the data lake are many connected services, including databases, data warehouses, big data processing, and machine learning. The architecture is flexible, and the implementation differs per company.”
The analyst reports that Amazon’s data lake service, known as S3 (or Simple Storage Service), stores more than 100 trillion data objects — more than 13,000 on average for every person on the planet. He estimates that S3 alone is a company worth $1.5 trillion, roughly the current market cap for Google’s parent company, Alphabet. Haissl believes S3 could generate more than 40% annual growth through 2030.
He also points out that all three cloud infrastructure providers offer tools on top of their data lakes to use the stored information effectively. “The strength of AWS, Azure, and GCP,” he says, “is that they have all the tools customers want.”
Haissl also notes that while AWS, Azure, and GCP appear similar on the surface, there are significant differences under the hood. Amazon and Google have their roots in distributed systems, big data applications, and machine learning. Microsoft’s strength, he says, lies in older technologies, such as the company’s SQL server database technology.
As for Snowflake and MongoDB, the Redburn analyst sees their opportunities as more limited than the Street consensus view, especially given that the cloud vendors control the data lake and offer many applications. “Snowflake and MongoDB have their core strengths in one area, which limits their ability to build an ecosystem. There is a positive side, but the market is probably too optimistic about it,” Haissl writes. He is also concerned about the large impact of share-based fees on Snowflake and MongoDB.
“The problem is twofold,” writes the analyst. “Firstly, the valuation consideration and how shareholders are diluting. Second, the broader implications for the business and cost structure. In a scenario where inventories remain low for longer, employees could demand higher salaries, which has far-reaching implications for the company’s margin potential.”
