Strong E-Commerce Growth Means Big Earnings for Web Services

According to the most recent annual release by the U.S. Commerce Department, e-commerce in 2017 was the strongest on record and also represented the strongest year over year growth since 2011.

Consumers spent approximately $453 billion on online retail purchases in 2017, an increase of 16% over 2016, itself a record year. 13% of all retail sales are now internet transactions.

As existing retailers increasingly work to move sales and advertising away from brick and mortar enterprise to more efficient online platforms and new internet-only entrants strive to gain market share online, the market for web services to support online operations has been growing at a furious pace.

The World Leader

Internet sales pioneer Amazon (AMZN) realized way back in 2002 that their massive infrastructure could be scaled and sold as a service to other companies as an economical way to run their own web businesses. Writing proprietary software and maintaining huge amount of costly and power-hungry hardware in a server farm is a daunting task for smaller retailers, but adding incremental capacity is relatively easy for Amazon.

Amazon has since added thousands of non-commercial customers to its huge list of merchants.

By 2015, Amazon Web Services had more than a million active customers, including 2,000 government agencies, 5,000 educational institutions and 17,500 nonprofits.

Web services accounted for $17B in sales in 2017, approximately 10% of total revenue of $177B.  Sales in 2018 for Web Services are expected to be in excess of $20B.

Aided by the out-performance of AWS, Amazon reported a blowout Q1 2018, earning $3.27/share versus analyst estimates of $1.22/share.  16 upward revisions since then have the Zacks Consensus Earnings Estimate for 2018 at $12.10/share, up from $8.49/share just 30 days ago and earning AMZN a Zacks Rank #1 (Strong Buy).

The Cloud Champion

Akamai (AKAM) operates in a slightly different sub-sector of Web services, providing a content delivery network to its customers that handles approximately 2 trillion transactions per day.  The company has seen strong demand for inline media and entertainment options over the internet, much of which passes through Akamai’s 200,000 servers in 1,400 networks around the globe.

Akamai is also positioned to take advantage of the growing popularity of streaming services to mobile devices as end users increasingly expect high-quality content to be delivered over mobile data networks.  

Cyber Security sales are also on the rise as companies seek to address concerns about the security of cloud computing and employ more and more sophisticated measure to combat hackers and data theft, requiring ever-growing computational capacity. In Q1, Akamai reported revenue of $669M, an 11% increase over the same quarter in 207, but revenue from Cloud Security Solutions grew at 36% year over year.  

During its Analyst conference call, Akamai raised guidance for 2018 revenues to a range of $2.69B to $2.72B and earnings to between $3.15/share and $3.25/share.  Analysts are even slightly more optimistic and the Zacks Consensus Earnings estimate now stand at $3.27/share. Akamai is a Zacks Rank #1 (Strong Buy).

 

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