Cloud services seen growth driver for Amazon

BENGALURU:’s shares surged more than 20 per cent in early trading on July 24, adding more than USD 46 billion to the company’s market value, after strong growth in the e-commerce giant’s cloud business drove a surprise quarterly profit. The company’s market capitalisation soared to more than 270 billion, overtaking that of Wal-Mart Stores, the world’s biggest retailer.

Revenue from Amazon’s cloud operations - Amazon Web Services nearly doubled in the second quarter, indicating that the business was poised to drive sustainable earnings for the online retailer, Wall Street analysts said. Operating margins at the unit jumped to 21.4 per cent from 7.7 per cent.

“Product sales are Amazon’s bread, but AWS is its butter,” Wedbush Securities analyst Michael Pachter said in a note, raising his price target on the stock by 21 per cent to USD 700. “They delivered a large profit, we expected a loss, they exercised discipline and did not invest in new consumer electronic product launches.”

The company drew investor ire last year for spending too much after its Fire Phone and Fire TV failed to excite consumers. Morgan Stanley raised its price target to USD 740 - the highest on the stock - implying a 53 per cent increase from July 23 close of USD 482.18. The stock touched a high of USD 580.57 on July 24.

At least 24 brokerages raised their target price. The median target price on the stock is USD 645.50. Of the 43 analysts covering the stock, 34 have ‘buy’ or higher ratings, according to Thomson Reuters data. Investors have raised concerns that the company’s aggressive spending may not pay off. But strong growth in AWS and positive commentary on the Amazon Prime service allayed some worries.

“The scale of their distribution network is starting to generate better incremental margins,” Barclays analyst Paul Vogel said. “That, coupled with the continued strong growth in both revenue and margins at AWS, moves us from cautious to optimistic on the next year of growth for Amazon.”

Amazon considers AWS its main engine of growth, along with Amazon Prime and Marketplace, where the company acts as a middleman for third-party vendors. Amazon broke out AWS revenue and income for the first time in the first quarter.