Key Points
Its AWS cloud business has a backlog stretching nearly three years at its current run rate.
Amazon is spending big to fulfill computing demand -- and that looks like the right move.
Looking at a company's backlog is a great way of understanding how much business it has coming. With Amazon's (NASDAQ: AMZN) cloud computing wing, Amazon Web Services (AWS), reaching $496 billion during the second quarter, it's safe to say a lot of revenue has yet to be recognized.
But how big a deal is this figure? The answer may surprise you.
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AWS is Amazon's most important segment
While most investors will be familiar with Amazon's e-commerce business, AWS is the real cash cow. During Q2, it generated 60% of Amazon's operating income despite making up only 21% of its sales. This tells me that AWS's profit margin is far superior to that of its commerce counterparts.
Amazon is also spending as if AWS is its most important segment, as it plans to shell out $220 billion on capital expenditures this year, with nearly all of it going to building out data centers. As demand increases for cloud computing capacity, Amazon has to spend big to build out data centers to meet demand. With the AI arms race being the biggest computing demand the world has ever seen, Amazon is doing the smart thing by building out capacity to meet demand, but it still can't build enough.
AWS's $496 billion backlog tells me a few things. First, at AWS's current run rate ($42.2 billion last quarter), it would take nearly 12 quarters or three years to churn through the backlog. That's a long wait, but it shows just how high demand is. The second thing it tells me is that Amazon cannot build fast enough to meet demand. This is a great problem to have.
During Amazon's conference call, CEO Andy Jassy noted that it will not be able to fulfill demand in 2026. He expects the same in 2027. Amazon is starting to see 2028 demand appear, showcasing just how strong the cloud computing industry is becoming.
Because of that, I think it's safe to say that Amazon is on a multi-year growth trajectory that will send the stock to new heights. With Amazon trading at a relatively low historical valuation, now is the perfect time to buy.
AMZN PE Ratio (Forward) data by YCharts
I'm a buyer of Amazon's stock at below $270 per share, but I'd still hold that opinion even if the stock were $300. Amazon is one of the best values in the market now.
Keithen Drury has positions in Amazon. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.