There's a silver lining in Amazon's slowing AWS growth

While Amazon has given back a chunk of its early gains, it’s still up 1.7% at $US933.50 a share as of 1:05 p.m. ET. The company reported better than expected earnings and revenue following Thursday’s closing bell.

Amazon earned an adjusted $US1.48 per share, well ahead of $US1.07 that Wall Street was expecting. Its revenue of $US35.71 billion edged out the $US35.3 billion that was anticipated.

In a note sent out to clients on Friday, Credit Suisse analyst Stephen Ju raised his price target for Amazon from $US1,050 to $US1,100, implying an upside potential of almost 18%. He maintained his “Outperform” rating on the stock.

Additionally, Ju reminded investors that Amazon is much more than a retailer, and that it owns one of the world’s biggest cloud computing providers, Amazon Web Services. He said that while AWS growth is slowing, it’s still going strong.

Amazon reported $US3.7 billion in AWS revenue during its latest quarter, a 43% increase from the same period a year ago. Despite the impressive numbers, growth has now slowed for seven straight quarters.

However, there is an important silver lining with regards to AWS — more people are using it. Here’s Ju (emphasis ours):

“Given greater headwinds from price decreases, that FX neutral revenue growth for AWS remained at 43% suggests that usage actually accelerated — this ties with the outsized growth in unearned revenue reported on the 4Q16 results. As we have noted then, this speaks to the increasing growth in customer bookings and hence what we expect to be a more moderate pace of deceleration on a go-forward basis.

Ju said that there are three reasons to buy Amazon stock:

  1. “Re-establishment of e-commerce segment operating margin expansion as Amazon grows into its larger infrastructure.”
  2. “Ongoing margin benefit due to shipping loss moderation.”
  3. “Upward bias to AWS revenue forecasts and likely more moderate deceleration path as suggested by ongoing capital intensity in the business.”

Click here for a real-time Amazon chart.

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