Amazon.com, Inc. (NASDAQ:AMZN)’s profit margins are likely come under pressure in the near-term as the company boosts capital expenditure to expand its cloud business. In a collaborative note, KeyBanc Capital Markets and Pacific Crest say that 2016 will be an investment year for Amazon.
In particular, Amazon.com, Inc. (NASDAQ:AMZN) is expected to funnel the bulk of its 2016 capex to Amazon Web Service (AWS). Expanding into new regions and taking more market share in the public cloud space are seen as some of Amazon’s top priorities in 2016.
Because of increased capital expenditure in 2016, the rating firms predict that Amazon’s profit margins will come under pressure in the near-term. However, they believe that the long-term should be rewarding for patient investors.
In the last quarter, KeyBanc notes that AWS contributed 8% of revenue and 52% of operating profits. By taking more market share from the competition, Amazon can significantly boost revenues and profits flowing through AWS.
Amazon.com, Inc. (NASDAQ:AMZN)’s AWS is already the giant of the public cloud, accounting for 21.7% of all the revenue generated by the top-10 public cloud providers, who include Microsoft Corporation (NASDAQ:MSFT).
The currently low cloud penetration means that AWS has a huge growth opportunity ahead of it.
Amazon.com, Inc. (NASDAQ:AMZN) is looking to expand its AWS footprint to four new regions in 2016. The regions being targeted are Ohio (the U.S.), the U.K., Korea and India.
Adding four regions in one year will be the fastest geographic expansion of AWS given that it has only one region in the last two years. Currently, AWS has a presence in five countries.
KeyBanc and Pacific Crest don’t expect Amazon.com, Inc. (NASDAQ:AMZN) to engage in cloud pricing wars in 2016. They note that the company’s aggressive pricing strategy in 2014 caused more harm than good.
The firms have an Overweight rating on Amazon.com, Inc. (NASDAQ:AMZN) with a 12-month price target of $800, of which AWS accounts for $283 of the price valuation.
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