Tiernan Ray | Barrons
February 1, 2016
Morgan Stanley’s Brian Nowak today reiterates an Overweight rating on Amazon.com, while warning that Apple, which she also covers, could decrease its usage of Amazon’s AWS cloud computing services.
Drawing upon work by his colleague, Katy Huberty, who follows Apple stock, Nowak writes, “We see evidence of AAPL’s intention to move away from AWS,” writes Huberty, based on what appear to be Apple’s plans to bulk up on its own data center resources.
Referring to last Tuesday’s conference call on fiscal Q1 results held by Apple CEO Tim Cook,
On its calendar 1Q:16 earnings conference call, Apple called out data center expenditures as one of the main drivers of its expected 2016 capex growth (+30% y/y). 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% of AWS’s 6.7mn square feet in data center capacity at the end of 2015.
Huberty opines Apple spent a billion dollars on data centers last year, including money paid to Amazon. “If we assume data center costs remain 5% of Services Revenue and that 90% of Apple’s data center costs are paid to AWS, we estimate Apple will spend $1.05bn on AWS in 2016 and $1.18bn in 2017 …meaning Apple would represent 9% of our estimated AWS 2016 revenue.”
Huberty writes that one has to consider the time it would take Apple to switch away, which could be as long as one to two years, the time it has taken companies to drop other outsourcing-style arrangements, or it could take less time given the flexibility of cloud.
She adds “[Amazon's] ability to grow faster than we expect would also lessen the impact from a potential loss of Apple.”