Amazon (NASD: AMZN) stock was up more than ten percent this week, following a report by Citigroup analyst Mark Mahaney projecting Kindle sales of 380,000, double his previous estimate.
The extra Kindle sales themselves would not generate significant revenue – even Mahaney’s optimistic projections would only amount to 4% of Amazon revenues in 2010. But what generated the market response was Mahaney’s comparison of Kindle sales to iPod, noting that 340,000 was the same number of iPods sold by Apple in its first year, 2002.
While the unit sales comparison may be accurate, those expecting the Kindle adoption curve to match that of the iPod are likely to be disappointed. The demographics of the buyers are very different and I think the Kindle will continue to be a niche product for the next few years.
At the same time, I am bullish on Amazon’s growth potential, but not because of the Kindle. What excited me about Amazon is the strength of its core eCommerce business combined with the upside potential of its cloud computing platform.
I’ve been a longtime supporter of Amazon. I began buying from Amazon in 1996 and hardly a week goes by without an Amazon box arriving at my door. While many of my purchases are for books or music, I buy a diverse set of products through Amazon. This morning, a box of coffee K-cups for my Keurig coffee maker arrived. I use Amazon Prime, so everything I order is shipped 2-day air at no cost. As a result, I rarely comparison shop unless it’s for a big-ticket item. While analysts criticized Amazon when it introduced Prime, I think the loyalty it commands from users significantly outweighs any direct shipping expenses.
Despite the challenges in the U.S. eCommerce space, Amazon continues to gain market share. ComScore reports that U.S.-based unique users grew 14% in July, year-over-year, compared to 5% growth in the overall U.S. Internet traffic. Meanwhile revenue growth among existing users continues to be strong, accounting for roughly half of Amazon’s revenue growth over the past two years.
While it grows the top line, Amazon continues to leverage its logistics infrastructure to maintain a low cost structure. Amazon also continues to grow its third party sales, growing its position in a market once dominated by eBay.
While Amazon’s eCommerce platform, diverse product offerings, customer experience excellence and low-cost infrastructure justify its current valuation, what gets me excited about Amazon is the upside potential from their cloud computing initiatives. Amazon, of course, is a company that was born in the cloud. Like Alacra and other Internet-only businesses, Amazon built its business on an ASP model. Last year, Amazon decided to turn its know-how for hosting solutions into a business, launching a SaaS web services platform. Today, Amazon Web Services (“AWS”) boasts more than 400,000 registered developers and is beginning to generate measurable revenue (while Amazon doesn’t break out specific revenue for AWS, the “other” category, which includes AWS, contributed $126 million in Q1).
Amazon Web Services is basically a computing infrastructure for rent to companies. This is a significant game-changer, especially for startups. A few years ago, a tech startup might need to spend $1 million or more on hardware and hosting capabilities, not to mention having to hire significant operations talent. Today, leveraging AWS, that same startup can rent those capabilities, gaining scale-on-demand. Merrill Lynch analyst Justin Post projects the hosted computing market to be a $5 billion market in 2008 with significant growth beyond that.
Amazon is not alone in the cloud of course. Google has some comparable offerings and Microsoft is moving in that direction as well, while emerging startups like Kevin Ryan-led 10gen are promising. But Amazon has staked out an early leadership position and should gain a significant share of this fast-growing market.
Disclaimer: I am long Amazon.
