The Cloudy Side of Amazon

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

While Amazon (NASDAQ: AMZN) is most widely known for its retail presence, both as a marketplace for goods and in terms of its Kindle line of tablets and e-readers, the less well-known side of the company may be the one with the most growth potential. The Amazon Web Services (AWS) division has quietly become one of the biggest players in cloud computing in both the U.S. and in the world. Interestingly, where the company trumpets its victories on the retail side of the business, it has remained tight-lipped on the specifics of AWS. All the same, if you look carefully, you can see that AWS has immense growth in its future and should serve as a basis for owning the stock.

The Importance of the Cloud

Cloud computing has become a buzz word in the tech world, attracting attention to any product that can manage to work the moniker into its title. The nature of cloud computing, however, tends to be varied, covering a wide expanse of meanings and uses. As with all things “i,” Apple (NASDAQ: AAPL) has helped to put the term into the mainstream lexicon with iCloud. This service allows users to store data, pictures, video and more on a remote server that is accessible from any connected device. While this covers the basic concept, it stops far short of the capability being leveraged at AWS.

Google (NASDAQ: GOOG) is another major cloud player that is bringing this concept to the mainstream and helping it gain acceptance. Through Google Apps, the company gives users access to various software applications and corresponding storage capabilities. As both corporations and governments begin to adopt this modality, we can see an important shift in attitudes about the cloud. Where institutions once required all of their information to be stored internally for security reasons, the shift to web-based options like Google Apps demonstrates the accelerating acceptance of the technology.

Other players including Microsoft (NASDAQ: MSFT) and Intel (NASDAQ: INTC) have made a push into the cloud, recognizing the critical nature of this type of access to their respective future successes. The cloud allows companies to receive software updates in real time, avoid the need for mass amounts of onsite storage and decreases the need to maintain complete IT departments that struggle with increasing rates of obsolescence. Cloud computing has become the theme of the next generation in computing making it a critical area to understand before deploying investment capital.

Amazon’s Role

While the AWS division participates in some of the activities described above, where the company is excelling is in renting computer server time and data storage capacity to companies that would otherwise need to create in-house server farms. There are countless examples of fledgling technology companies that are skipping the expense of developing internal systems and instead turning to services like AWS to cut costs and do some of the heavy lifting. Instagram, for example, which sold for roughly $1 billion less than two years after its founding, did the bulk of its development in the cloud.

While there are no hard numbers available from Amazon, estimates place annual revenue around $1 billion and growing rapidly. Projections suggest that there is significant upside here. Andrew R. Jassy, head of AWS, said: “we believe at the highest level that A.W.S. can be at least as big as our other businesses.” To put the figure in context, Amazon did around $50 billion in revenue last year, meaning that the growth potential is significant.

The Trade

While Amazon critics like to take shots at the Kindle and the corporate approach the company takes to a great many things it does, this is one area that justifies including the stock in your core portfolio. Whether the Kindle can compete with the iPad or the Microsoft Surface, Amazon’s three domestic and addition global computer centers are doing well and growing fast. Based on its cloud computing capacity alone, Amazon is a buy at current levels.

Foolish Bottom LIne

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Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, Google, Intel, and Microsoft. Motley Fool newsletter services recommend Apple, Amazon.com, Google, Intel, and Microsoft. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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