“AWS had the unusual advantage of a seven-year head start before facing like-minded competition, and the team has never slowed down. As a result, the AWS services are by far the most evolved and most functionality-rich. AWS lets developers do more and be nimbler, and it continues to get even better every day. That’s why you’re seeing this remarkable acceleration in AWS growth, now for two quarters in a row.” – Jeff Bezos, Amazon founder, and CEO

Source: FPT Technology Magazine

Summary

• Robust performance in Q1 2018
• Sustainable growth despite the intense competition
• Currently, I take hold position on AMZN as the current price is at the upper limit based on technical analysis

Amazon.com, Inc. (NASDAQ: AMZN) is keen on global infrastructure expansion and recently eyed vast potential of Latin American market. Amazon Web Services (AWS) aims to expand cloud-computing operations by adding data centers in the region. As the unquestioned market leader with market share of nearly 40%, AWS is continuing its steady upward growth and brought Amazon robust cash inflow with expanding customer base. According to Bain & Company research, global cloud IT market revenue is predicted to increase from $180 billion in 2015 to $390 billion in 2020, attaining a Compound Annual Growth Rate (CAGR) of 17%, and AWS achieved 42.88% sales increase in the fiscal year of 2017.

Robust financial performance and more potential

As the result on the latest conclusion in the quarter ended March 31th, 2018 shows, AWS attained a revenue of $5.44 billion, achieving a year-over-year increase of 48.6% in Q1 2018 compared to the first quarter 2017, outperforming the industry’s average of 19.4%. The segment contributed 10.7% of consolidated sales but 74.7% of consolidated operating income. The operating income of AWS reached to $1.4 billion, surging by 57.3% when compared to the comparable prior year period.

During the first quarter of 2018, cash capital expenditure in Q1 2018 was $2.7 billion and was invested to support fulfillment operations and technology infrastructure, bringing AWS additional capacities. Two Availability Zones and one Local Region in Osaka, Japan have been added to AWS’s infrastructure portfolio and currently, there are 54 Availability Zones within 18 geographic Regions. AWS also announced plans for 12 more Availability Zones and four more regions including Bahrain, Hong Kong SAR, Sweden, and a second AWS GovCloud Region in the U.S. to be published before early 2019. More data centers in the local markets help to reduce latency and support Amazon’s capacity to provide efficiency for users to architect applications.

The yellow circles suggest the number of Availability Zones in the regions where they pin. The green circles are where the target regions locate. Source: Amazon Web Services

Additionally, the latest quarterly report disclosed that as of March 31^st, 2018, there are customer contracts for future services with average remaining life of 3.2 years standing for unrecognized revenue of $12.4 billion, which are primarily related to AWS. For the second quarter, net sales are expected to be between $51.0 billion and $54.0 billion, with the growth of between 34% and 42% compared to the comparable last year period. The portion that AWS would contribute is estimated to surpass the current level.

Sustainable growth despite the intense competition

Cloud lift market value. Source: FactSet

As the largest market player, AWS maintained its market dominance by providing from pay-as-you-go service for smaller startups to a multi-year contract model that targets long-served companies like Siemens and Airbnb, and also serving customers form public sectors in building scalable and stable users systems. According to Synergy, its competitors include Microsoft (with market share of 13%), IBM (8%), Google (6%), and Alibaba (4%) and they are gaining share at the expense of small- and medium-sized cloud providers whose collective market share now drops below 18%. AWS by achieving economies of scale and providing one-stop shop for customers. This year, companies including Shutterfly and GoDaddy announced they're going "all-in" on AWS, followed by Ryanair, the Europe’s busiest airline, shifting to AWS’s Aurora from Microsoft SQL Server database and using AWS services for its booking system and analytics. Even though Amazon compete fiercely in Prime Video with streaming giant like Netflix, "the vast majority of media companies are using AWS," said Andrew Jassy, the CEO of AWS.

 Andrew Jassy, the CEO of Amazon Web Services. Source: Bloomberg

To maintain its market share, besides expanding operations to more regions, AWS also lowered services prices and added solutions and products. On one hand, along with other main players, AWS offer discount program for enterprise customers. As the long-term contract makes up a relatively small portion of the revenue, where the majority comes from shorter commitments, AWS applies the model to provide much flexibility based on the customers’ actual business needs with options include hourly payment. On the other hand, it is trying to differentiate its services to win this “cloud features war”. New machine learning services like Amazon Transcribe and Amazon Translate create more situational application like customer services, subtitling, and search. The expansion of VMware Cloud enables the combination of a wide variety VMware tools and interfaces with the flexibility and power of the AWS cloud.

Security backed up by cloud

Source: CyberArk

According to The Changing Faces of the Cloud published by Bain & Company, data security, regulatory & compliance requirements and vendor lock-in become the three most significant concerns for enterprises customers when they transition workloads to the cloud. AWS announced that all of its generally available services and products comply with the European Union’s General Data Protection Regulation (GDPR). AWS launched AWS Secrets Manager, a new service that helps customers easily rotate, manage and retrieve secrets like credentials and API keys in the AWS cloud and provides them protected access to their applications, services and IT resources.

"Our customers' data is our customers' data. Full stop.” Jassy said.

Technical analysis and analysts recommendations

During the first quarter ended on March 30^th, the stock price increased by 21.73%. 2018, which shows a very significant uptrend with the upside momentum increasing and the price reached to the ceiling of nearly $1,600 dollars in mid of March. After that, the price dropped down but not fell below the prior bottom and rebounded slightly. In the meantime, the fast MACD crossed over the slow MACD very quickly and kept moving above the slow MACD, followed by a sharp price jump with the trading volume also reached to its highest level as the first quarterly report published. The increasing momentum showed a losing trend but the price stayed above $1,550 and the fast MACD starts to cross above the slow one in the most recent trading day.

Source: StockTA.com

Source: Yahoo Finance

Analysts from Yahoo Finance who monitoring this stock tend to have the consensus that they are quite confident about Amazon’s performance for the Q2 2018 and currently, 43 out of 47 analysts choose to give the recommendation to buy or hold.

Current I Know First algorithm forecast for AMZN

Go here to read how to interpret this diagram.

In I Know First algorithm forecast dated on May 30^th, 2018, the signal is 4.35 and the predictability is 0.29, suggesting that AMZN is very likely will not have a price boost in the medium term since the signal does not give a very positive prospect. I Know First’s forecast recommends to hold.

Past I Know First forecast success with AMZN

As the article published on April 15th, 2018 suggested, I Know First made an accurate forecast on AMZN with its bullish 90-day and one-year algorithmic market trend forecast. In the article, we pointed out facts that support our endorsement on the company as a long-term investment, which are global expansion and the strong Amazon Prime subscribers base.

Since the article released, the stock price has increased by 12.72%, which is in accordance to I Know First’s forecast.

Conclusion

I take hold position on AMZN because based on my analysis, the good tracking record and potential brought by AWS to the Amazon’s consolidated sales is sustainable. AWS’s market leadership and its development in services would help it attain more customers and keep the growth as expected. We don’t think cloud services along with other features AWS have are in a cyclical business so the business cycle risk is not obvious. The regulatory risk on data security has been mitigated through our design to prevent security breach.

The technical analysis suggest the current price is at the upper limit and further breach is waiting to be seen to confirm the upside chart pattern in the longer term.