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Why Amazon Web Services Is Key to Amazon’s Profitability

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AWS now constitutes more than 50% of Amazon’s operating profits

Amazon (AMZN) has been successful in managing and growing its cloud business. Its AWS (Amazon Web Services) segment has witnessed stellar growth in the past few years. What started as an auxiliary service to support the company’s core e-commerce business now contributes more than 50% of the company’s overall operating profit.

In 1Q16, Amazon’s revenue from AWS rose by 64% YoY (year-over-year) to $2.4 billion. The segment’s operating profits tripled, from $195 million in 1Q15 to $604 million in 1Q16—over 50% of Amazon’s total operating income, which stood at $1.1 billion.

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How AWS will be Amazon’s future growth driver

Amazon is a market leader in the e-commerce space, and there’s no denying that the company’s e-commerce business can grow much larger, especially given its Amazon Prime membership and Marketplace initiatives.

However, AWS is growing faster than the company’s traditional business segment. Amazon has invested heavily in its cloud computing arm, keeping it ahead of the competition.

AWS has managed to grow at an astonishing rate. The segment also generates strong margins. Despite cutthroat competition from Google (GOOG), Microsoft (MSFT), and IBM (IBM), Amazon’s AWS has managed to maintain its leadership position in the cloud computing space.

With growing demand for remote storage and related features, AWS remains well positioned to leverage the fast-growing cloud services market.

Amazon constitutes nearly 6.5% of the PowerShares QQQ Trust, Series 1 ETF (QQQ).

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