Cloud Giants Expanding to Edge, Larger TAM Than Expected
Amazon reported earnings on Thursday with revenue growing 21% YoY to $87.5 billion and operating earnings at $3.9 billion (44% above consensus). The slam-dunk quarterly performance might prove the recent bear cases against Amazon wrong and the market reacted very positively by a large re-rating.
Amazon’s Prime One Day is a massive hit among consumers. Online sales reaccelerated meaningfully YoY to 15% during Q4'19. More importantly, the success of Prime One Day helped Amazon expand its higher-margin businesses such as “third-party services”, “subscription business” and “advertising business”. In the quarter, the third-party services, with $17.4 billion revenue, reaccelerated to 31% YoY growth. Prime membership subscription surpassed 150 million subscribers in 2019 with revenue topping $5.2 billion in Q4'19. To put things in perspective, Amazon’s quarterly subscription revenue is 56% more than Costco’s full fiscal year membership revenue ($5.2 vs $3.4 billion). Amazon’s advertising business is also taking share in the emerging triopoly in digital advertising: $14 billion in revenue in 2019 with a growth rate of 39% YoY.
What's more exciting and more relevant to us is Amazon's cloud business: AWS grew 34% YoY in Q4'19 with operating margin expansion to 26%. The strong performance helped unease investors worry over intensifying competition with Microsoft Azure as both companies have been investing heavily to expand the TAM for the public cloud market. We continue to appreciate the effort from AWS as it is aggressively rolling out next-generation cloud solutions such as serverless (AWS Lambda) and edge compute (AWS Outposts) to address the computing demand driven by the data explosion in the era of 5G. We summarize AWS's cloud wins and new products and/or new features rolled out in 2019 below.
On a separate note, AWS revised depreciation schedule by extending server useful life from 3 years to 4 on the back of efficiency and maintenance gains. Such change is expected to deliver $800mn in cost savings for AWS in Q1'20.
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Microsoft also reported another strong quarter beating consensus across all segments. Intelligent Cloud grew 28% YoY (constant currency), driven by the re-accelerated growth from Azure (+64%) and Server products (12%). Microsoft impressively managed to expand both its gross margin (500bps-ish YoY) and operating margin (600bps-ish YoY). During the conference call, Microsoft CEO Satya Nadella particularly highlighted the importance of edge computing: “Every customer will need a distributed computing fabric – across the cloud and edge – to power their mission-critical workloads and meet regulatory and operational sovereignty need. we expanded our portfolio of edge appliances. Azure Stack Edge brings rapid machine learning inferencing closer to where data is generated.”
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