Amazon Web Services: What's it worth?

Summary:Amazon Web Services appears to be valued at a discount relative to software as a service companies. Should infrastructure as a service players always be discounted relative to application-based peers?

Amazon has a bevy of growth businesses rolling at once---Prime, with its new price increase, consumer product goods efforts such as Amazon Pantry and e-commerce to name a few---but Amazon Web Services may be valued at a discount relative to other cloud companies.

That argument was floated by Oppenheimer analyst Jason Helfstein, who raised his price target for Amazon shares based on a few moving parts.

  • Amazon's recent Prime price increase by $20 will add $453 million in earnings before interest and taxes, or 62 cents a share. Helfstein assumes Amazon will have 25 million Prime members by the end of 2015 and a 16 percent churn rate. Other analysts have also assumed that Amazon customers will absorb the Prime price increase, but shipping costs still hurt the e-commerce giant.
  • Amazon will step up its focus on consumer product goods and better compete with Wal-mart and ultimately generate another $46 billion in revenue.
  • Amazon Web Services trades at a discount relative to other cloud companies despite higher sales growth.

Playing with the building blocks of the cloud: Getting IaaS right

Playing with the building blocks of the cloud: Getting IaaS right

That latter point is worth a few brain cycles. After all, AWS could be the crown jewel of Amazon---especially on the profit margin front---but little is known about the financials given that unit is still categorized as "other" in the earnings statements.

Previously:  Amazon ups Prime fee to $99 from $79: Customers likely to absorb it

Looking at a basket of software as a service companies, Helfstein noted that the group, which includes Workday, ServiceNow and Salesforce among others, trades at 10.6 times estimated 2015 revenue. Amazon Web Services is valued at 6 times 2015 revenue estimates.

One thing worth noting here is that AWS is an infrastructure as a service play. Applications as a service is stickier with customers because it's harder to swap. With infrastructure it doesn't take a rocket scientist to see that algorithms will squeeze infrastructure players and find combinations to maximize value per computing instance.

In that regard, AWS is going to be a strong commodity computing player with thin margins (but not nearly as thin as e-commerce).

Here's a look at Helfstein's AWS revenue estimates.

aws value


The big takeaway here is that AWS will become a larger part of Amazon's overall value. But the harder argument to make is that AWS should be valued similar to applications players. Software is---and always will be---more valuable than infrastructure.

Topics: Cloud, Amazon, E-Commerce

About

Larry Dignan is Editor in Chief of ZDNet and SmartPlanet as well as Editorial Director of ZDNet's sister site TechRepublic. He was most recently Executive Editor of News and Blogs at ZDNet. Prior to that he was executive news editor at eWeek and news editor at Baseline. He also served as the East Coast news editor and finance editor at CN... Full Bio

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