Amazon's cloud business will surpass Oracle as the second-largest enterprise software provider in the next 12 to 15 months, analyst Rohit Kulkarni of MKM Partners said.
Amazon is more than just another company selling people toys, tools and t-shirts. Amazon Web Services has helped its parent company become better known as a technology company since its initial offerings arrived in 2006, and it's considerably more profitable than the company's core e-commerce business. As a result, AWS income has become central to Amazon's bottom line: AWS generated $2.26 billion in operating income in the third quarter, 71% of the company's total operating income, while it generated $9 billion in revenue, 13% of Amazon's total revenue in the quarter.
"AWS is growing to $45 billion, maybe $50 billion in revenue next year. Oracle is doing $41 billion," Kulkarni, who has a buy rating on Amazon stock, told CNBC in an interview on Tuesday. Analysts polled by FactSet currently see $45.76 billion in AWS revenue in the 2020 fiscal year, while the Refinitiv consensus for Oracle's 2021 fiscal year, which ends in May 2021, is $41.12 billion.
There is significance to Amazon displacing Oracle in enterprise software, whenever it happens. Oracle's relational database has long been a staple in large enterprises that have to store massive amounts of data, and Amazon itself had been a huge customer.
But in 2014AWS began competing more seriously in relational databases, with the launch of the Aurora service. And in 2016 Oracle introduced second-generation cloud infrastructure in an effort to challenge AWS. The competition was concerning enough to Oracle that founder Larry Ellison criticized it in a 2017 meeting with analysts, saying, "Amazon has no expertise in database. Amazon runs their entire operation on Oracle."
Amazon meanwhile sought to cut its reliance on Oracle software and lean more on AWS' own offerings, and earlier this month Amazon said it had turned off the last Oracle database it had used for its consumer business.
AWS has major customers including Apple, Capital One and Lyft, and Amazon can expect more AWS revenue to come in over the next few years. At the end of the third quarter Amazon had $27.4 billion in customer contracts longer than one year for services that had not been delivered, primarily for AWS, according to the company's most recent earnings report.
Meanwhile, the company continues to challenge Walmart in commerce, and Facebook and Google in advertising, and FedEx and UPS in logistics, Kulkarni said.
"When a company like Amazon has scale across verticals, there is a scenario they could become No. 1 in all those verticals," he said.
In the past four quarters AWS generated more revenue than SAP, which was previously larger than AWS. Consensus estimates from Refinitiv suggest that analysts do not see AWS overtaking Microsoft, the top enterprise software company, by revenue at least through 2021.
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