Alibaba Just Had Its Amazon AWS Moment

Since April 23, 2016, shares of Amazon's (NASDAQ: AMZN) have risen 157%. This was no accident. On that day, as part of its first-quarter earnings results, Amazon broke out its Amazon Web Services (AWS) division results for the first time.

The response from investors was dramatic:

AMZN data by YCharts.

How much revenue AWS actually generated for Amazon had long been a source of speculation. Was the service, a cloud-based data management and storage service, even profitable?

The answer, as it turned out, was a resounding yes.
For the first quarter of FY 2015, AWS generated revenue of $1.57 billion, up from $1.1 billion for the same quarter in 2014. What's more, in those first three months of 2015, AWS netted Amazon a profit of $265 million on an operating margin of 17%.
Needless to say, Wall Street loved what it saw. Amazon, long known for its lack of interest in near-term profit generation, had built a fast-growing cash cow right under Silicon Valley's nose.
In the time since, AWS has continued to deliver. In Q2 2017, AWS sales were $2.89 billion. An eye-popping 42% rise over Q2 2016's showing. Operating income for the division was an astonishing $916 million. 
And that brings me to why Alibaba (NYSE: BABA) is so attractive today. As investors just learned, it too has created its own extremely profitable, cloud-based storage business.

A great business gets even better

Alibaba's company-wide results for its first fiscal quarter, reported August 17, 2017, were nothing short of spectacular. BABA reported adjusted earnings of $1.17 a share (handily beating the estimated $0.92). Total revenue was $7.4 billion for the period, 56% more than the same quarter last year.
While the main headlines all focused on robust e-commerce growth in China, a far more interesting data point was contained in the report: Alibaba Cloud. While still in its infancy, revenue in this department surged almost 100% to $359 million. 
For now Alibaba Cloud is a small portion of the tech giant's top line, but as Amazon's past is any indication it could grow to be a meaningful part of the business and aid the company's already strong margins. 

Even better than Amazon, and with a far larger potential market 

It has been noted that Alibaba has more in common with eBay than Amazon. It serves as a marketplace for hundreds of thousands of retailers to reach consumers, thus avoiding the need to incur massive capital costs of maintaining inventories in warehouses. 

This is not to detract from Jeff Bezos's remarkable achievement. His enterprise is changing the very way goods are sold (and delivered). Alibaba simply has a more profit-friendly business model. In FY 2016, Amazon's gross profit margin was 36%. Alibaba's was 63.5%. With the addition of an Amazon AWS-like cloud service, Alibaba's ability to generate profits in the years ahead has only improved.

With its shares at 34 times forward S&P Global Market Intelligence earnings estimates, Alibaba's stock may seem expensive. However, analysts currently estimate that the company's EPS will grow at 31% per year through 2022, a year in which they believe the company will earn just below $14.82 per share. This compares strongly to Amazon's own earnings growth profile. Analysts following the company expect Amazon to earn around $3.50 this year and grow the bottom line to $36.72 by FY 2021. 

Alibaba has just had its Amazon AWS moment. And, as icing on the cake, it trades at a lower earnings multiple than the company it is so often compared to. Wise Fools would do well to give Alibaba strong consideration as an addition to their portfolios. 

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Sean O'Reilly has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.



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