Amazon Primed for New Stretch of Hypergrowth
An important transition is happening at Amazon.com, Inc. (Nasdaq: AMZN): The e-commerce giant is leveraging Amazon Web Services (AWS), its cloud business, to become the center of the enterprise world.
AWS figured prominently on Thursday when the Seattle-based company reported first-quarter financial results. The unit brought in 47% of profits while representing only 12.4% of sales.
Now, AWS’s leader Andy Jassy is set to run all of Amazon.
Jassy took the helm in 2003 at AWS. He is scheduled to replace Jeff Bezos as chief executive in the third quarter of 2021.
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Jassy reimagined AWS in 2003 as Internet OS, an operating system of sorts where developers could build, test and package modular software that could be run everywhere in the cloud. He had product managers set up building blocks for databases, data storage and computer processing, and by 2006, the business was offering a complete suite of pay-as-you-go web services to enterprises.
At the same time, AWS engineers were testing new modules at Amazon.com, its first and biggest client. Innovation was constant. Processes veered toward standardization, automation and scale, with the fruits of this labor first showing up in logistics at Amazon fulfillment centers (FCs). FCs became a petri dish for artificial intelligence (AI), robotics and machine-learning innovation.
A corporate video tells the fascinating story of how AWS systems process 400 million packages every day.
AI algorithms predict what products customers will order based on geography, socioeconomics, age and gender. Thousands of robots then scan and move that inventory within the 800,000 square foot FCs. Only seconds after goods hit the warehouse floor, they are available for sale online. Machine learning regulates where those products are stowed and how they are selected, boxed by workers and ultimately sorted for delivery. It’s a whirlwind of software, machines and workers.
Perfecting Amazon FCs made the online retailer a behemoth. Amazon.com now accounts for nearly one-third of all online sales in the United States.
More importantly, the business case study provided AWS with a wealth of software tools that have been rolled out to other enterprises.
One of those enterprises is Aurora, a relational database built from the ground up to run in the cloud. Another is Neptune, a point-in-time service that works seamlessly with Aurora. And Sagemaker, a machine-learning module, is used by developers to build software applications that learn on the fly. Paired with the infinite scale of AWS, the combination is unbeatable.
Amazon.com managers noted on Thursday that The Walt Disney Co. (NYSE: DIS) selected AWS for the rollout of Disney+, its 100-million-member subscription video on demand (SVOD) service. The National Hockey League, Professional Golfers’ Association (PGA) Tour and Formula One racing are using Sagemaker to customize viewer experiences with real-time stats and analytics. In the automotive world, Torc Robotics, a subsidiary of Daimler AG (OTCPK: DDAIF), is using AWS for its autonomous driving platform.
From its humble beginnings two decades ago, AWS is now a colossus. The company has a $54 billion annualized run rate, up 32% from a year ago. And there is no end in sight to the growth.
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According to a report at Venture Beat, research firm CCS Insight found that 65% of enterprises plan to increase their IT budgets during the next 12 months. Half expect to migrate 50% of their budgets to the cloud by the end of 2021.
That’s why Andy Jassy is the perfect man to run Amazon.com at this time. Building new businesses in the cloud is his forte, and AWS holds a scale advantage over competitors.
Investors are worried about the departure of Jeff Bezos … but they shouldn’t be concerned. Jassy taking over is akin to Satya Nadella succeeding Steve Balmer at Microsoft Corp. (Nasdaq: MSFT).
Jassy is a proven winner in the fastest-growing part of the business. Investors should expect Amazon.com to run more like AWS. That’s a good thing.
After testing its record high on Friday, Amazon.com shares backtracked. The stock trades 49.2 times forward earnings and 4.2 times sales. The company reported $67.2 billion in 12-month operating cash flow compared to $39.7 billion a year ago.
Longer-term investors should strongly consider buying the stock on a pullback.
Jon D. Markman