Amazon Stock Could Soar Over the Next Few Years -- and It's Coming From an Unlikely Source
Written by Keithen Drury for The Motley Fool -> Its AWS unit is the primary reason why investors should consider Amazon's stock. Amazon has already pushed out one competitor before with custom chip designs. Amazon (NASDAQ: AMZN) isn't the first company you think of when you he
Its AWS unit is the primary reason why investors should consider Amazon's stock.
Amazon has already pushed out one competitor before with custom chip designs.
Amazon (NASDAQ: AMZN) isn't the first company you think of when you hear "big tech." Its commerce platform dominates the minds of most consumers, but now that it's mostly mature, it's really not that great of a business to be invested in from a growth standpoint. Instead, its cloud computing business, Amazon Web Services (AWS), is a far more compelling reason.
AWS has some major growth tailwinds thanks to unprecedented artificial intelligence (AI) spending, and it has an unlikely revenue stream in that segment that could lead to the stock producing market-crushing returns over the next few years.
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First, investors need to understand why Amazon is more cloud-focused than commerce-focused. During Q1, 57% of revenue came from North American commerce and 22% came from International, leaving 21% for AWS. That may sound like a counterargument, but that's not what investors care about. Commerce businesses have notoriously thin margins, and investors care more about profits than revenue. During Q1, AWS accounted for 59% of Amazon's operating profits -- a trend that has persisted over the past year.
So, while AWS may not bring in as much revenue as commerce, its superior operating profile allows it to generate the majority of Amazon's profits, which is why it's investing $200 billion into capital expenditures this year -- mostly to build out its data center footprint. Amazon isn't doing this on a whim, either. It already has customers lined up to utilize some of the computing capacity being built out, making this less risky than it sounds.
Amazon's CEO, Andy Jassy, pointed out to investors in its shareholder letter that the faster AWS grows, the more capital investment is required to sustain that growth. With huge demand upcoming for cloud computing, Amazon is spending big to ensure it stays the top cloud computing provider.
