The #CloudExit Movement And What It Means For Amazon Stock
Contributor since 2013 / 23 Followers
Summary:
- The #CloudExit movement is calling for businesses to move away from cloud providers like Amazon and back to on-premises infrastructure.
- Amazon’s cloud-computing division, AWS, generates the majority of the company’s profits and is critical to its financial performance.
- High-profile businesses like Basecamp and X have successfully adopted #CloudExit strategies, achieving significant cost savings.
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The cloud computing industry has been booming for the past two decades, with Amazon Web Services (AWS) being the undisputed leader. However, a growing movement called #CloudExit, which was started by the founders at Basecamp, is calling for businesses to move away from cloud providers like Amazon (NASDAQ:AMZN) and back to on-premises infrastructure for possible cost savings. This movement could pose a significant threat to Amazon’s stock price.
According to Amazon’s 2022 annual report, AWS is the most profitable segment of Amazon’s business, accounting for a significant portion of the company’s overall profit. For the year 2022, cloud-computing revenue generated 74% of Amazon’s operating profit, despite accounting for just 13% of the company’s total revenue. This highlights the high profitability and critical importance of AWS to Amazon’s financial performance.
The following table breaks down Amazon’s operating profit by segment in 2022:
| AWS: | 18.5 billion USD (74%) |
| North American Retail: | 8.7 billion USD (29%) |
| International Retail: | 2.3 billion USD (8%) |
| Amazon Advertising: | 1.9 billion USD (6%) |
| Other: | 1.2 billion USD (4%) |
As you can see in the table above, Amazon’s cloud-computing division generates more than 2 times the amount of profits generated by any other segment, including Amazon’s huge retail business. This dominance is driven by the high margins associated with cloud computing services, margins that potentially be squeezed by increased competition from other cloud providers as well as the impact of the #cloudexit movement.
What is the #CloudExit movement?
The #CloudExit movement is a grassroots effort gaining popularity in certain developer circles that is calling for businesses to reconsider their use of cloud computing. Proponents of the movement; such as Basecamp founder David Heinemeier argue that cloud computing is too expensive, too complex, and too risky. They also argue that cloud providers like AWS have too much power and that businesses need to take back control of their data.
Examples of High-Profile Businesses That Have Adopted #CloudExit
Basecamp
In his article titled “We Have Left the Cloud,” David Heinemeier Hansson details his company’s successful migration away from cloud services to self-operated hardware, achieving substantial cost savings. The six-month transition involved bringing on-premises 6 services, including Basecamp Classic and Highrise, promising continued support for existing users. The most impressive move was transitioning the cloud-born HEY email service to their new infrastructure.
Utilizing an open-source stack with tools like KVM, Docker, and Kamal, the company avoided the complexities of Kubernetes and enterprise service contracts. The cost analysis revealed done by David and his team says that there will be estimated annual savings of at least $1.5 million by owning hardware compared to renting from Amazon Web Services (AWS).
Remarkably, they didn’t see a need for an increase in the size of the team, challenging the notion that cloud services inherently lead to increased productivity with smaller teams.
In his article, Heinemeier encourages established companies to reconsider the cloud, asserting that benefits are often overstated, and costs are usually higher. The article concludes by urging readers to conduct their own cost analysis and evaluate their specific needs, emphasizing the availability of tools for a successful cloud exit. The experience shared in the article has prompted other companies to rethink their cloud expenditures, highlighting the potential for considerable savings.
X (aka: Twitter)
Elon Musk’s company, X, is celebrating significant cost savings of 60% following its #CloudExit strategy, as revealed by the engineering team. The move involved optimizing the use of cloud service providers and transitioning to on-premises solutions. Notably, the shift reduced monthly cloud costs by 60%, achieved by moving media/blob artifacts out of the cloud. Additionally, cloud data storage size was reduced by 60%, and cloud data processing costs saw a remarkable 75% reduction.
Given earlier reports indicating X’s annual spending of $100 million on AWS, the 60% reduction suggests potential savings of $60 million per year. What makes this accomplishment even more impressive is the concurrent downsizing of the engineering team to a quarter of its previous size. Formerly employing around 8,000 individuals, X reportedly now operates with less than 2,000 engineers.
The X story underscores the potential impact on CFOs and investors, highlighting that Musk’s success in running a streamlined operation with substantial savings from exiting the cloud could inspire other corporations to explore similar strategies. The #CloudExit concept, as exemplified by X, might be on the verge of becoming a mainstream trend, prompting businesses to evaluate the financial benefits of transitioning away from cloud services.
What are the potential risks to Amazon stock?
The #CloudExit movement could have a significant impact on Amazon’s stock price. If a large number of businesses decide to move away from AWS, it could lead to a total collapse in profits for the company given AWS’s importance in the company’s financial performance and their lack of profitability in their other divisions. The heavy reliance on AWS for profits makes Amazon vulnerable to any downturn in the cloud computing market. If demand for AWS services were to decline, it could have a significant impact on Amazon’s overall profitability.
Conclusion
It is too early to say what the long-term impact of the #CloudExit movement will be. However, it is clear that the movement is gaining momentum and that it is a potential threat to Amazon’s dominance in the cloud computing market.
Investors should be aware of the potential risks to Amazon stock and should monitor the situation closely.
In addition to the #CloudExit movement, there are a number of other factors that could affect Amazon’s stock price in the future, including, increased competition from other cloud providers, and economic downturns.
Investors should consider all of these factors when making investment decisions.
Analyst’s Disclosure: I/we have a beneficial short position in the shares of AMZN either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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