Main content

AWS fuels growth at Amazon - cloud business up 40% year over year

Derek du Preez Profile picture for user ddpreez February 4, 2022
Summary:
The headlines from Amazon’s latest set of results are caught up in the company raising its prices for Prime, but its AWS cloud business continues to drive forward.

Image of a hand touching a cloud
(Image by Tumisu from Pixabay )

Amazon's fourth quarter results for the period ended December 31, 2021, show a delicate balancing act - one that requires significant investment to scale the company's operations in order to drive revenue growth. But what's clear from the behemoth's latest set of numbers is that its cloud business, AWS, continues to be a powerhouse for the company. 

Investors have reacted positively to Amazon's latest numbers, with shares up 15% in after hours trading. This is likely down to the company's announcement, which is attracting a lot of headlines, that it is raising the price of its Prime membership (for North America) to $139, up 17%. 

But let's take a closer look at the numbers for Q4 2021: 

  • Net sales increased 9% to $137.4 billion, compared with $125.6 billion in Q4 2020. 

  • Operating income decreased to $3.5 billion, compared with $6.9 billion in the same period last year. But net income increased to $14.3 billion in Q4, up from $7.2 billion in the year prior. 

Amazon all announced its fully year 2021 numbers, which include: 

  • Net sales increased 22% to $469.8 billion, compared with $386.1 billion in 2020. Operating income increased to $24.9 billion, compared with $22.9 billion in 2020. 

  • Net income for the full year increased from $21.3 billion in 2020 to $33.4 billion in 2021. 

However, speaking to analysts, CFO Brian Olsavsky pointed to the strong growth being seen within AWS and highlighted how the cloud computing business is continuing to scale. He said: 

AWS saw a continuation of the strong usage and revenue growth we've seen throughout 2021. AWS added more revenue year-over-year than any quarter in its history, and it's now a $71 billion annualized run rate business, up from a $51 billion run rate one year ago. AWS revenue grew 40% year-over-year in Q4, our fourth consecutive quarter of revenue growth rate acceleration.

Highlighting some of the significant customer wins, Olsavsky said: 

In the past quarter alone, NASDAQ announced a multiyear partnership to migrate North America markets to AWS, including their matching engine. Best Buy selected AWS as its preferred cloud provider for cloud infrastructure services. Meta, the parent company of Facebook, Instagram and WhatsApp selected AWS as its long-term strategic cloud provider to accelerate artificial intelligence research and development. 

And Stellantis, the parent company of Chrysler Dodge, Fiat, Jeep and Ram selected AWS as its preferred global cloud provider for vehicle platforms to accelerate new digital products and upskill its global workforce. 

You can find more examples in our earnings release of how the world's largest companies such as Adidas, Goldman Sachs, Pfizer, Rivian and more are using AWS to transform their businesses.

And there are a number of factors driving this growth at AWS. Olsavsky explained: 

On the growth rate, I think it's a combination of things. We've been adding resources in sales and marketing over the last few years, and that is starting to pay off. There was some cutback in spending in the early parts of 2020 that we're lapping as people - different companies have different COVID experience, some of their volumes went through the roof, some of their volumes went through the floor. 

So as things have stabilized, I think the lasting thing is that a lot of people made the commitment to go to the cloud, better understood the benefits of that and probably accelerated their internal timelines for that. 

So that is what we're seeing, and we're pleased with the acceleration in the business the last four quarters. 

But as noted above, continuing to scale comes with its own challenges and Amazon has undertaken a project to extend the shelf life of its hardware. This is helping to drive costs down for AWS. Olsavsky said: 

We're prospectively updating the useful life of our servers and networking equipment, beginning in January. As a practice, we monitor and review the useful lives of our depreciable assets on a regular basis to make sure that our financial statements reflect our best estimate of how long the assets are going to be used in operations. 

We are increasing the useful life for servers from four years to five years and network equipment from five years to six years. As a result, our first quarter guidance includes an approximate $1 billion of lower depreciation expense. We expect the quarterly impact of this change to decrease throughout the year. 

Although we're calling out an accounting change here, this really reflects a tremendous team effort by AWS to make our server and network equipment last longer. We've been operating at scale for over 15 years, and we continue to refine our software to run more efficiently on the hardware. 

This then lowers stress on the hardware and extends the useful life, both for the assets that we use to support AWS' external customers as well as those used to support our own internal Amazon businesses.

Scaling the rest of the business

But it's not just AWS that Amazon is having to scale. The fourth quarter results highlighted how the company is having to balance demand, staff and infrastructure to meet the customers where they are, given their expectations. For instance, Olsavsky said: 

We've invested significantly to keep pace with this demand, including nearly doubling our operations capacity in the past two years, expanding our fulfillment center footprint while adding significant transportation assets to ensure fast on-time delivery. There are now 1.6 million Amazon employees worldwide, also doubling in the two-year period. Our fourth quarter operating income was $3.5 billion.

But this growth is going to require higher spending, which will continue to push costs up going forward. Olsavsky added: 

Loss productivity and network disruptions were driven primarily by labor capacity constraints due to challenges in staffing up our facilities for peak. This is driven by the very tight labor market in the second half of 2021 and more recently by the emergence of the Omicron variant. We do expect these cost challenges to persist into Q1, albeit adjusted for lower seasonal volumes relative to the fourth quarter.

Our results also include approximately $1 billion year-over-year negative impact from lower fixed cost leverage in our fulfillment network. Recall that we saw very high unit volumes for most of 2020 and the first half of 2021 and that the fulfillment network was running at close to 100% capacity during this time. 

Now with more normal fulfillment capacity, our operating leverage decreases versus the comparable prior year periods. We expect to continue to see some negative year-over-year impact from this in Q1 of 2022. While we navigate these near-term headwinds, the fundamentals of our retail business are strong and we are optimistic about a number of growth businesses and a strong innovation pipeline.

If I look to the future, we're still working through some of our plans for 2022, but it's coming into focus a bit. We see the CapEx for infrastructure going up. We still have a very fast-growing business, growing globally, and we're adding regions and capacity to handle usage that still exceeds revenue growth in that business. So, we feel good about making those investments.

My take

It doesn't look like Amazon is showing any signs of slowing down just yet. 

Loading
A grey colored placeholder image