AWS: The Most Important Business in the World That Few Investors Understand

Summary

Amazon Web Services (AWS) is arguably the most important and most misunderstood business in global capital markets. While its name is widely known, few institutional investors fully appreciate how dominant AWS has become, and how deeply embedded it is in the global software and AI ecosystem. AWS is not merely a cloud storage provider — it is the Home Depot of software builders, offering the tools, infrastructure, and primitives that power a massive and growing share of the digital economy. With over $100 billion in annual revenue, 37% operating margins, and high switching costs that rival those of any business in history, AWS deserves far more attention than it currently receives. As the world’s digital backbone, AWS is uniquely positioned to grow earnings and cash flow for the next decade.

Thesis

1. Unparalleled Growth and Profitability From 2013 to 2024, AWS delivered a compound annual growth rate (CAGR) of 38% in revenue and 45% in operating income, reaching $107.6 billion in revenue and $39.8 billion in operating profit in 2024. The company’s operating margin surged to 37% — a stunning figure for an infrastructure-heavy business. This isn’t a fluke. AWS operates at global scale, serving every major industry from banking to biotech, and its growth continues despite the law of large numbers. Why? Because the software economy — the real economic engine of the U.S. — continues to expand, and AWS is its foundational platform. 2. Software Is America’s Industrial Policy by Default The U.S. may lack a formal industrial policy, but it dominates in software. While China cornered manufacturing, the U.S. doubled down on code — and AWS became its core infrastructure. Just as factories powered the 20th century, software will power the 21st — and AWS is the equivalent of roads, bridges, and electricity. Software businesses are also where the US allocates capital. Nearly one-third of private equity-backed companies are software or internet services businesses. AWS has the biggest market share and is especially strong in attracting start-ups. 3. The Power of Primitives What makes AWS so sticky? One word: primitives. These are the basic building blocks of cloud infrastructure: S3 for storage, EC2 for compute, Lambda for serverless functions, API Gateway, IAM for permissions, and now Bedrock for AI. Once a company integrates these primitives, it becomes extremely difficult to leave. AWS users don’t just rent servers. They build workflows, data architecture, and permission systems — all of which are deeply integrated and customized. Over time, these workflows represent can millions of dollars or hundreds of hours of time in sunk cost. The longer a company uses AWS, the harder it becomes to move. 4. AWS Wrappers Everywhere An underappreciated insight: many “software companies” are effectively wrappers on AWS primitives. For example, Snowflake — a $50 billion data platform — builds on AWS and adds user interface and functionality. In many ways, AWS is the operating system of modern software development. The genius of AWS is that it lets entrepreneurs focus on the top layer of the stack while AWS handles everything below — compute, database, networking, AI infrastructure, and security. That’s why startups, corporations, and AI researchers all rely on AWS. 5. High Switching Costs, Compounding Lock-In AWS enjoys some of the highest switching costs in the world. Once a firm builds with IAM policies, networking configs, serverless functions, and API integrations, migration to Azure or Google Cloud becomes a massive project requiring deep technical resources. Most don’t even consider it. The addition of AI and ML workloads increases this lock-in. AI models depend on vast quantities of data, compute infrastructure, and reliable networking. AWS offers all of this — and more importantly, makes it easy to combine with the rest of the cloud stack. 6. The Mini-Entrepreneur Explosion We are in the early innings of the mini-entrepreneur revolution. Post-COVID, hundreds of thousands of professionals are building small businesses on Shopify, YouTube, Substack, Patreon — and running these businesses on AWS. AI amplifies this trend. With LLMs and tools like Bedrock, even solo operators can build powerful services. AWS becomes the platform not just for startups, but for armies of solo developers. The cost to build a tech business has collapsed, and AWS is capturing the value. 7. Massive Moat, Tiny Competition The Western cloud infrastructure market is a four-player race: AWS, Microsoft Azure, Google Cloud and Oracle. In China, it’s Alibaba and Tencent. The barrier to entry is extraordinarily high — you need global data centers, regulatory compliance, developer evangelism, and enterprise sales. Despite Microsoft’s scale and Google’s engineering, AWS continues to lead on most metrics: breadth of services, developer mindshare, and operating profitability. And AWS’s culture — customer-focused, developer-obsessed, and relentlessly operational — is still Amazon at its best. 8. Underappreciated in Asset Management Despite its size, few asset managers understand AWS. It is buried within Amazon’s broader financials, which also include retail, advertising, and logistics. Investors who analyze AWS separately — or value it as a standalone business — will see a very different picture. If AWS were spun off, it would be worth over $1 trillion, with higher margins than Microsoft and an arguably stronger growth profile. But buried within Amazon, it gets discounted. That’s the opportunity. 9. Clear Path to Cash Flow Domination At 37% operating margins and 20–25% expected revenue growth over the next five years, AWS is on track to generate over $100 billion in operating profit by the end of the decade. Very few businesses in the world offer that combination of scale, growth, and margins. Capital expenditures are significant, but increasingly efficient. As software matures and AI tools proliferate, customers consume more services per dollar spent. And since AWS charges based on usage, the upside is uncapped. Final Thoughts from Mikey “The Moat” Maloney: I love this business. The more I dig, the more impressed I am. AWS combines all the things I look for: a global monopoly-like position, high switching costs, recurring revenues, and a business model that scales with usage. It reminds me of Visa in payments or Microsoft in operating systems. But most investors don’t see it yet. They think AWS is just “cloud.” They don’t understand that AWS is the software infrastructure of the future. We’re not just investing in a server farm. We’re investing in the digital backbone of a new economy.

Risks

1. Slower Cloud Migration Growth • Some workloads have already moved to the cloud. Future growth depends on newer workloads (e.g., AI) and international expansion. The tailwind is strong but may decelerate in some verticals. 2. Competitive Pressure from Azure, Google and Oracle • Azure has a strong installed base via Microsoft 365 and has grown rapidly. Google Cloud is innovative and price competitive. Oracle is also trying to muscle in and has become an established fourth player. The pricing in this space is complicated, but in many services Oracle is the cheapest. If AWS fails to match their offerings in GenAI or developer tools, it could lose share. 3. AI Commoditization • If GenAI becomes heavily commoditized, with Open Source models dominating and infrastructure usage flattening, AWS’s AI services might face pricing pressure. 4. Capital Allocation Risk • AWS must continue investing tens of billions in data centers and infrastructure. Missteps in capital allocation could impact returns, especially as interest rates remain elevated. The increase in capex for AI has been a big concern for investors. It is seen as a risk rather than an opportunity.

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Tags

• AI
• Growth
• Technology