Earlier this year, Amazon made the massive decision to start breaking out the financials of its cloud services business, AWS.
Amazon’s Q1 and subsequent earnings reports revealed that the web services business is both profitable and fast-growing.
Thanks to AWS, the notorious money-loser turned a profit its last two quarters.
In Q3, AWS contributed only 8% of Amazon’s revenue, but accounted for 52% of its operating profits because of its improving margins and market share gains.
But in a new note, analysts at Pacific Crest warn investors that 2016 could bring a “narrative shift” for AWS as the company pushes for more aggressive expansion.
In order to have the bandwidth to keep eating up market share, Amazon plans to open up several new cloud facilities, which would cause a spike in spending, according to Pacific Crest.
Here’s the crucial part of the note (emphasis ours):
AWS is the largest cloud player, but has only ~1% market penetration with a footprint in five countries,” the analysts write. “Next year, we expect AWS to aggressively expand, adding four new regions (Korea, the U.K., India, Ohio) vs. one new region in the past two years. This should elevate capital expenditures and D&A, which could pressure operating margins in 2016. However, we believe these investments provide to further accelerate share gains and sustain high growth.
Right now, AWS has cloud capacity in 11 regions, each with multiple data centres, and spanning five countries. On average, each region generated~$715 million of revenue, with that average revenue per region more than doubling in the past two years.
So, while a push for new regions seems to make long-term sense, Amazon’s cloud business may not keep up the healthy profits that helped the company’s stock price more than double in 2015.
Of course, slimming down margins and eschewing profits to reinvest into future businesses has always been Amazon’s oft-stated priority.
Disclosure: Jeff Bezos is an investor in Business Insider through hispersonal investment company Bezos Expeditions.
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