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Amazon's New Projects Outweigh Cloud Woes

In a very short time, phrases like 'on the cloud,' and 'cloud computing' have become part of day in day out corporate vernacular. With more and more companies using this innovation to share information with employees, clients, and vendors in real-time, Internet giants like Amazon, Google, and Microsoft have realized the potential profits for providing cloud-based services -- and the potential downfalls when servers fail.

However, with intense competition comes intense scrutiny. While a violent series of thunderstorms in the Mid-Atlantic region a few weeks ago, Amazon faced a temporary shutdown of its EC2 cloud computing services. This shutdown hurt several companies, including the popular dating site, Whatsyourprice.com, because clients could not use the service while peak hours. As a result, the company dropped EC2 and moved to another cloud provider.

Storms and technical difficulties are just some of many issues companies offering cloud services face on a daily basis. Most consumers now have a "connect wherever, whenever" mentality when it comes to the Internet, thanks to new innovation and slick marketing. So outages and other malfunctions instantly trigger outrage and psome clients to find other providers. However are consumers just becoming too difficult to please, or is faulty innovation, or an unfortunate weather event to blame?

Argument can be made that consumers demand too much

While an argument can be made that consumers demand too much and lack patience when it comes to Internet connection issues, companies promoting these services must as well take their fair share of the blame. For years, companies including Amazon, have touted fast delivery of products and services. Actually, one of the industry's biggest marketing tactics is 'fast, reliable service.' So, really, these companies created this growing consumer impatience monster by promising too much, too before long.

Even although Amazon has many other online endeavors, including on-demand streaming video services and online content creation assistance, this latest round of EC2 shutdowns could tarnish the company's reputation -- meanwhile in the cloud computing community. And with Google poised to enter the cloud computing market, this is the last thing Amazon needs right now.

The past three months

For the past three months, Amazon stock has seen some ups and downs. As of this writing, the stock price is hovering between $224 and $225. And during the power outages and subsequent shut down of EC2 service hasn't dramatically affected the stock price, if outages like this continue, businesses will go elsewhere for more reliable service. In the end, this could cause some investors to become skittish and seek shelter from more reliable companies.

One sticking point that may save Amazon from losing clients to other cloud computing services is its ability to cut prices for services when it needs to. With a net operating cash flow of $3.9 billion, the company has the means to slash prices of goods and services to remain competitive.

The company continues to show a profit each year

What's interesting to note here is that although the company continues to show a profit each year and has a healthy operating cash flow, its cost of goods sold is very high, absorbing much of the company's revenues. For instance, in 2011, Amazon earned $48.08 billion in sales revenue, however spent $38.44 billion in COGS. As a result, its net income was just $631 million.

This means that much of what the company brings in, it as well spends to maintain steady sales and revenue. This requires a delicate balance and careful monitoring of operating cash flow and costs in general. Investors should pay close attention to quarterly financials and reports about upcoming business decisions concerning the future of the company, as any misstep could cost Amazon and its shareholders a lot of money.

While Amazon has been suffering some setbacks in cloud computing, the company recently reported that it will manufacture its first smartphone. Coming off the success of the Kindle Fire, Amazon hopes this product will be such as or furthermore successful. However with other heavy competitors in the ring, including Google and Apple, this may be the tipping point investors need to watch out for when it comes to that delicate balance of sales/revenue vs. COGS.

Apple, in the meantime, is set to release a smaller version of its iPad. It has been estimated that the company may sell up to 6 million smaller devices by the end of the year. This could affect future sales of Kindle, Google tablets and the smartphone market as people may put off upgrading their current device in favor of upgrading to a smaller iPad instead.

In addition to entering highly competitive markets, including tablet and smartphones, Amazon is as well producing original content for its Amazon Instant Video online streaming service. This will allow the company to compete more aggressively with other streaming media giants like Netflix.

The horizon

With new projects on the horizon, Amazon's cloud computing issues seem small in comparison. Nevertheless what investors need to consider is the overall picture. Although creating new and innovative products and services may boost the stock price temporarily, if these goods and services fail to provide quality Internet connections, phone service or fail to entertain consumers, the stock price will in the long run fall. For more aggressive investors, Amazon remains a great play. I think the company has some amazing products and services that may require a bit more monitoring, but everything considered, these services are competitive, and very valuable to consumers.

More information: Seekingalpha