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Why Cloud Computing Services Are So Important to Amazon’s Growth

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AWS continues to grow at rapid pace

Amazon’s (AMZN) cloud computing segment, AWS (Amazon Web Services), has been growing at a rapid rate, and 2Q16 was no exception. AWS’s sales increased by 58% YoY (year-over-year) in 2Q16, driven by higher demand and usage, partially offset by a decline in prices.

The segment’s operating profit more than doubled to $718 million in 2Q16 from $305 million in 2Q15, thereby accounting for 56% of Amazon’s total operating income, which stood at $1.3 billion.

Amazon continues to invest in AWS at a continually faster pace. YTD (year-to-date), the company has added 422 new features and services to AWS, which compares favorably to the 722 new features it added in 2015.

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What to expect from AWS in the future

Amazon’s AWS segment has witnessed robust revenue and margin growth and is clearly the engine behind Amazon’s profit growth. The segment is growing faster than company’s traditional business segments, thanks to the increased investment that largely kept AWS ahead of the competition.

Meanwhile, the market for cloud computing continues to grow at a rapid rate, and Amazon—as an industry leader—is likely to keep benefitting significantly. That said, big names such as Microsoft (MSFT), Google (GOOG), and IBM (IBM) have also poured billions of dollars into their cloud businesses, which could slow down the pace of AWS’s growth in the future. At the same time, increased competition has forced service providers to lower their prices, and this could impact AWS’s margin growth as Amazon continues to cut the prices of its cloud solutions.

Continue to the next part for a more in-depth discussion of Amazon’s margins.

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