Amazon Web Services held reInvent 2015 in Las Vegas last week.
Our key conclusion is that Amazon (ticker: AMZN ) Web Services (AWS) remains the most disruptive force to traditional information-technology (IT) hardware, and exerts secular pressure on industry revenue and margins. We note it continues to grow at an impressive rate (81% for revenue, 95% for compute, 120% for storage, 127% for database), and now has a $7.3 billion revenue at annualized run rate.
Equally impressive is the continued momentum in customer traction and technological innovation. Now AWS claims to have more than 1 million active customers and its database business has reached $1 billion revenue at annualized run rate. Customers are increasingly moving workloads to the Cloud, with some even opting for all-in with AWS (like Netflix ( NFLX ), Intuit ( INTU ) and Juniper Networks ( JNPR )), from start-ups to mainstream enterprises (General Electric ( GE ), Capital One Financial ( COF ), Philips ( PHG ) and BMW [of Germany] to name a few).
AWS has been aggressively driving scale and innovation. It now has 11 regions with multiple sites and data centers in each. Its user capacity is 10 times the size of the next 14 cloud providers combined. Despite this, we see continued robust innovations at this year’s event including new features like Quicksight, Kinesis Firehose, AWS Import/Export Snowball and Amazon Inspector. All this, complemented with growing partnership group including Accenture ( ACN ) and Intel ( INTC ), suggests the company is pushing its advantage further.
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For International Business Machines ( IBM ) (rated at Underperform, $125 target price), while mission-critical workloads are likely to remain on premise, the allure of AWS, Google ( GOOG ) and Microsoft ( MSFT ) as well as developer’s affinity for those platforms potentially limits growth and pressures budgets available to IBM. Here, we see nearly 20% of pretax income negatively exposed.
As workloads migrate to Cloud, i.e., AWS, the need for Cisco Systems ( CSCO ) (rated at Underperform, $22 target price) gear is reduced. Further, the shift opens the use of alternatives, such as Arista, and internal development, like the Facebook ( FB ) switch, highlighting the threat to Cisco’s networking business.
While cloud is negative for EMC ( EMC ) (rated at Outperform, $34 target price), the company is better positioned than its peers given a significant exposure to mission critical on-premise applications, share gain in storage, leadership in software-defined storage, and VMware ( VMW ) and Pivotal cloud software.
With the Enterprise Group and Software challenged by cloud, a full 51% of Hewlett-Packard’s ( HPQ ) (rated at Outperform, $45 target price) operating profits are negatively exposed to secular cloud growth. We do believe that at 8 times price/earnings multiple these risks have been fully priced in. However, we note AWS’s success continues to remind us of the secular challenges. We note rising free cash flow and ample cash distribution underline our relative preference for [post-split] HP Inc.
Date: October 13, 2015