Amazon's Cloud Lead Is Overblown

Dana is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Amazon.com (NASDAQ: AMZN) is a stock a lot of small investors love to hate, because it is ridiculously expensive.

I had some from $180 to $230, then sold expecting a drop. Instead it's now near $260.

The company's success in online sales is just one reason why the stock refuses to drop. The other reason is its cloud platform. Amazon.com was the first to offer use of its cloud, dubbed EC2, and it has been aggressive in cutting prices for its use to maintain market share, making its Application Program Interface, or API, a de-facto industry standard.

The big news for 2013 is that this won't continue. There are three reasons I can write this with confidence:

  1. The system suffered its fourth outage of the year on Christmas Eve. Each time the same data center in northern Virginia was implicated. Amazon keeps 70% of its computing capacity at that data center, and this is becoming a point of failure, which enterprise computing managers find disquieting.

  2. Google (NASDAQ: GOOG) is getting serious about selling its own cloud capacity, and unlike Amazon's EC2 the Google Cloud Platform is redundant as well as scaled. A single problem in a single data center won't take it down. This is the next evolution in cloud, a system as resilient as the Internet itself, where problems are routed around and don't take down essential services.

  3. This is going to be the year of hybrid cloud. Technology managers in big businesses and government now have virtualized data centers, they trust the basics of cloud technology, and they are ready to move serious applications toward it. But they want control of that platform. OpenStack, an open stack platform pioneered through Rackspace (NYSE: RAX) and now used by telcos, HP (NYSE: HPQ) and Dell (NASDAQ: DELL), among others, offers that control.

It's true that Amazon can be made compatible with these other clouds through systems like Eucalyptus, run by former mySQL head Marten Mickos. But companies can get the same compatibility between Google's cloud and their OpenStack efforts through Cloudscaling. 

Being able to run high-capacity workloads on the Google Cloud while maintaining control of the family jewels in a private, OpenStack cloud, or skipping to a public cloud from HP or Dell along with a private cloud (probably with Dell or HP hardware) is going to prove compelling. Amazon's is the least-expensive cloud, but many computing managers will pay up for the security of a hybrid solution, knowing that Amazon is so dependent on a single data center.

All this means higher expenses for Amazon, and a falling market share. It doesn't mean collapse, it doesn't mean no growth, it means slower growth. And I'm not paying $260/share for slower growth. Are you?


DanaFBlankenhorn owns shares of Google. The Motley Fool owns shares of Amazon.com and Google. Motley Fool newsletter services recommend Amazon.com, Google, and Rackspace Hosting. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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