Billionaire VC says that most companies will eventually pay an Amazon 'tax'
Because Palihapitiya is a VC, he gets to invest in a lot of different companies. But if he had to put his entire capital in a single company and hold it for the next 10 years, Palihapitiya knows where his money's going: Amazon.
"I think Amazon is the most interesting company right now and represents the surest path to a $5 trillion (15-20x from current levels) market cap within 50 years," Palihapitiya wrote in a Quora Q&A session held this week.
But Palihapitiya's bet would have nothing to do with Amazon's e-commerce segment, the part of the business that generated over $23 billion in revenue last quarter alone. Instead, it's all about Amazon Web Services, the cloud computing unit of the company that's booking roughly $7 billion a year.
"The reason I think this has nothing to do with e-commerce, although e-commerce is their way of dog fooding the real reason: AWS," he said.
To explain his thinking, Palihapitiya compared AWS to a tax, in the sense that more and more companies will be expected to pay them a fixed fee every year, as they increasingly rely on AWS to run their services.
"AWS is a tax on the compute economy. So whether you care about mobile apps, consumer apps, IoT, SaaS etc etc, more companies than not will be using AWS versus building their own infrastructure," Palihapitiya said. "If you believe that over time the software industry is a multi, deca-trillion industry, then ask yourself how valuable a company would be who taxes the majority of that industry."
In previous decades, a lot of IT folks complained about the "Microsoft tax," meaning the large licensing agreements that covered Office and other software on all their PCs. Those agreements expired every few years, forcing companies to pay up. Palihapitiya foresees a similar move to Amazon.
We're already starting to see the effects of this movement. Buzzy consumer brands from Spotify and Netflix to big enterprises like Intuit and Juniper are all outsourcing their entire computing needs to AWS, rather than having to build and maintain their own infrastructure and data centers. Even non-tech companies like News Corp and Capital One are planning to shut down their own data centers to migrate to AWS's public cloud service.
That's turning into a massive cloud computing business sitting under Amazon's roof. Deutsche Bank recently estimated AWS itself to be worth roughly $160 billion, based on its huge market share and growth rate. In its most recent quarter, AWS grew 78% year over year, reporting $2.1 billion in revenue, after growing 81% in the quarter before that.
Plus, it's profitable at $521 million last quarter, giving it a healthy 25% margin. That's almost at the level of Amazon's e-commerce business, which recorded $528 million in operating income last quarter.
"I don't see any cleaner monopoly available to buy in the public markets right now," he said.
Disclosure: Jeff Bezos is an investor in Business Insider through hispersonal investment company Bezos Expeditions.
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