Here Is What The Stripe Deal Means For Amazon

Stripe may be the most important unknown big tech company, however the battle to secure its business is even more fascinating.

Executives at Amazon.com (AMZN) announced last week that the company is expanding its payments arrangement with Stripe. The deal also commits Stripe to Amazon Web Services, the giant cloud computing platform.

The fight is in the cloud. Investors should consider Amazon shares.

At its core, Stripe is an infrastructure business. For a fee of about 3%, the Dublin, Ireland-based company helps other businesses process online debit and credit payments. Businesses add the Stripe application programming interface to their website, customers enter their payment information, and presto, the payments begin. And unlike PayPal (PYPL), its main competitor, Stripe does not require buyers to set up a third-party account.

The Stripe API killed payments friction, and an empire was born.

Founders Patrick and John Collison grew up in Dromineer, Ireland, a rural town of less than 200 people. The brothers were gifted math and science students, and later attended MIT and Harvard, respectively. As college undergrads in 2009 they started Auctomatic, a software tool that allowed sellers on eBay (EBAY) to manage their listings and inventory. Within 10 months, Auctomatic was acquired for $5 million, and the Collisons began working on Stripe.

In the wake of the 2009 financial crisis, a wave of startups emerged. These new digital businesses relied on APIs to quickly build scale. The Stripe API quickly became integral to Lyft (LYFT), a ride-sharing business, Shopify (SHOP), an online storefront host, and hundreds of other small companies trying to process online orders. The deep-pocketed venture capital investors were not far behind.

A funding round in 2016 raised $150 million, at a valuation of $9.2 billion. The investment was co-led by CapitalG, the investment arm of Alphabet (GOOGL), according to a report from Wall Street Journal.

Analysts were curious when Amazon.com quietly partnered a year later with Stripe. A Bloomberg report noted that the Amazon.com agreement allowed Stripe to process “a large, though undisclosed portion” of transactions on the ecommerce platform.

Now that strategic deal is getting bigger, and making more sense.

According to a Stripe press release last week, the new partnership with Amazon.com dramatically expands the prior agreement. Stripe will become the payments partner for Amazon.com in the United States, Europe, and Canada, plus for a significant portion of payments across its subsidiaries like Prime, Audible, Kindle, Amazon Pay, Buy with Prime, and others. In return, Stripe agrees to expand its use of Amazon Web Services.

Cloud infrastructure, and platform services are expected to grow in 2023 to $150.2 billion, and $136.4 billion, up 29.8% and 23.2% respectively, according to research report from Gartner. Amazon.com is the global market leader with 25.9% market share, however Microsoft (MSFT) and Alphabet are growing quickly.

Executives at Netflix (NFLX) announced in July 2022 that Microsoft was selected to host its foray into digital advertising. Microsoft secured that account over Alphabet, a firm with much greater online ad expertise.

In 2016 a Google Cloud press release outlined the parameters for moving Spotify (SPOT) to Alphabet cloud infrastructure. That deal has since been strengthened.

The biggest cloud businesses in the world are battling for every iconic client. The war is for the future of workflow processing and digital storage. Only a few firms have the scale to win the largest, most important customers.

Winning the deal with Stripe, a company now valued at $74 billion, is a really big deal for AWS. It is a foundational business.

Investors often overlook AWS, yet the infrastructure business had $20.5 billion in sales during the second quarter of 2022 alone. Despite its huge size, the revenues are still growing at 33% year-over-year. AWS now accounts for 16% of Amazon.com net sales. Profits for the division were $5.4 billion.

At $102.24, the stock trades at 63.5x forward earnings and 2.1x sales. Although these financial metrics may not seem cheap, shares are historically underpriced.

Amazon shares moved earlier in the month up through the longer-term downtrend at $90, which is great. It can be bought on weakness. The next overhead resistance level is $120, then $138.50.

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