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Signs Apple (AAPL) is Moving Its $1B Yearly Spend Away from Amazon's (AMZN) AWS - Morgan Stanley

February 1, 2016 11:59 AM EST
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Morgan Stanley analyst Brian Nowak said they see evidence of Apple's (NASDAQ: AAPL) intention to move away from Amazon's (NASDAQ: AMZN) AWS. Nowak estimates that Apple will spend $1 billion on AWS in 2016, or 9% of AWS revenue.

The analyst highlighted that on Apple's latest earnings conference call they company called out data center expenditures as one of the main drivers of its expected 2016 capex grow. Apple has announced 3 data center openings over the next 2 years – a "command center" for its global data centers in Mesa, Arizona (planned opening in 2016) and one data center each in Ireland and Denmark (planned opening in 2017). "In total, we estimate Apple is building approximately 2.5mn square feet of data centers to power iCloud storage, iTunes, App Store and other services...nearly 40%," the analyst said.

Nowak sees this as a signal Apple is looking to move away from AWS. "... we believe this build is a signal that Apple is increasingly likely to move away from AWS in the next 18-24 months," he said.

The firm estimates Apple will spend $1.05bn on AWS in 2016 and $1.18bn in 2017. This means Apple would represent 9% of our estimated AWS 2016 revenue.

The analyst said the loss of Apple's ~$1bn annual spend could materially impact AWS's revenue growth and potentially overall profitability. However this may not happen all at once. Historically it took companies 1-2 years to fully ramp up/down infrastructure outsourcing contracts, the analyst notes. Also, the firm said they do not know how much of its computing Apple intends to move away from AWS.

All is not lost for AWS, however. The analyst said AWS's non-Apple growth and runway is also important to consider. "AWS business is still growing 69% YoY and we're modeling 48%/35% YoY growth in full year 2016/2017," the analyst highlighted. AWS addressable market is $240bn and growing.

As such, the firm maintained an Overweight rating and price target of $800 on AMZN.

For an analyst ratings summary and ratings history on Amazon.com click here. For more ratings news on Amazon.com click here.

Shares of Amazon.com are down 1.6% early to $577.51.



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