Tech

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

May we all have such well-appointed storm shelters. 

Amazon Web Services is Amazon's gold-plated umbrella from the tempest of investors' demands for the company to turn a profit that's more than a few bucks once in a while. It's hard to imagine now that Amazon only last year started breaking out the financial results for its 10-year-old cloud-computing operation. In hindsight, it was the smartest move Amazon could have made.

AWS is now growing so quickly and generating such tidy profits that investors have (mostly) stopped grumbling about Amazon's famously skimpy, if any, profits. Amazon said on Thursday that revenue at AWS rose 58 percent in the second quarter compared with figures in the period a year earlier. That was about in line with Wall Street expectations, although slower than the growth rate of recent quarters.

The cloud division's operating profit margin, excluding employee stock compensation and some other costs, reached a record 30 percent, or $863 million. AWS now generates less than 10 percent of Amazon's total revenue but 56 percent of its total operating profit including stock compensation. 

Profit Feast and Famine
Amazon typically generates small profits -- if it has any at all. But the Amazon Web Services cloud division is a profitable island inside of the company.
Source: Bloomberg
Note: Segment operating income excludes stock compensation and some other costs.

AWS is simply remarkable. It is one of the most important new technology products of the last decade, going toe-to-toe with the iPhone. AWS made it possible to churn computing chores at relatively low costs; without it, we probably wouldn't have Pokemon apps on our phones or Netflix movies in our homes. AWS has shaken up the information technology industry -- a business with $2 trillion in annual customer spending worldwide.  

And even better for CEO Jeff Bezos, AWS gives him leeway for all the crazy projects he wants to undertake because he has the long leash of AWS profits. Bezos can fulfill his every whim to splurge on package-delivery drones, Netflix-like web video programming, talking home speaker systems, Amazon cargo ships, home grocery deliveries, e-commerce in India and much more, and lean on AWS to paper over the expensive forays. It's a beautiful relationship. 

Heading into Amazon's second-quarter report, analysts were uncertain about how fast AWS could keep growing. It's not only that AWS already generates $10 billion a year in revenue and faces dangerous rivals including Microsoft and Google, but it was also coming off an unusual year. In 2014, AWS's revenue growth and especially its profit margins were pinched by a cloud price war kicked off by Google. Financial performance suffered for a couple of quarters, and perversely that made it easier for Amazon to show bright results in 2015. That temporary lift brought down the growth rate in the second quarter, but it is still enviable. 

Silver Living to This Cloud
Amazon's AWS cloud computer operation is growing quickly for a business with about $10 billion in annual revenue
Source: Bloomberg

The big danger to Amazon is people might be overestimating the company's appetite for profits. Net income in the second quarter was a record for Amazon, although that is a low bar. Wall Street is expecting much more. Analysts expect Amazon to generate $7.6 billion net income this year and next, according to estimates compiled by Bloomberg. That would be roughly three times Amazon's combined annual net income since it went public 19 years ago.

Bezos won't be worried about meeting those expectations. He's got his trusty lieutenant AWS providing cover as he launches his pricey sorties on other companies' business models. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Shira Ovide in New York at sovide@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net