Amazon | The Everything Company

Expanding Margins, Diversified Revenue Streams, and Exciting Growth Opportunities

Amazon Inc, The Everything Company

---

Disclaimer & Disclosure: The author has a position in Amazon. This post is for informational purposes only and should not be construed as investment advice. Conduct your own due diligence and seek professional investment advice before making any investment decisions.

---

Amazon.com, Inc. (AMZN), with its remarkable $2.29 trillion market capitalization, hardly needs an introduction. The name has become as recognizable as Coca-Cola, a testament to its global influence and ubiquity.

Amazon went public in 1997 at $18 per share. Since then, the stock has split four times: a 2-for-1 split in 1998, a 3-for-1 followed by a 2-for-1 split in 1999, and a massive 20-for-1 split in 2022. If you bought one share during the IPO, you'd now have 240 shares, making the original IPO price just $0.075 per share.

Fast forward to today, with Amazon's share price at $225, your investment would have grown 3,000x. To put it another way, a $10,000 investment in Amazon back in 1997 would now be worth an incredible $30 million.- where’s Marty McFly’s time travelling DeLorean when you need it most?!?

But with Amazon's remarkable growth story, the pressing question is whether it still presents a viable investment opportunity or if that ship has sailed.

For me, Amazon remains the most compelling investment among the Magnificent Seven stocks (Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla).

Alphabet’s core business is advertising, powered primarily by Google search. A few years ago, I relied exclusively on Google for all my internet searches. Now, I prefer Perplexity and other AI tools. Despite Alphabet’s heavy investment in its "other bets," none have significantly contributed to the company’s value. Even with a decade-long head start and far deeper pockets than OpenAI, Alphabet lost the generative AI race. OpenAI, only founded in 2015, has since surged ahead. So what does the future hold for Alphabet?

Apple's sales and profits have been weak over the past couple of years. This weakness has been masked by a share price that has doubled—largely driven by factors unrelated to business performance, such as massive stock buybacks and passive investment flows. Meanwhile, Apple’s share of the smartphone market is declining, and the company faces a Department of Justice investigation for alleged anti-competitive practices in its App Store. Even Warren Buffett has sold his Apple shares.

NVIDIA is undeniably a great company, led by the visionary Jensen Huang. However, it operates in a highly cyclical market currently at its peak, with valuations far exceeding its unit economics. Even Huang has been selling substantial amounts of his holdings. In 2024, he reached the maximum 6-million-share threshold he’s permitted to sell under his 10b5-1 plan. Since 2020, he has sold over $1.4 billion in stock and continues to do so. When a CEO sells heavily, is it the right time to buy?

I could go on, but you get the idea - this isn’t about the other six stocks; it’s about Amazon. This is the only one of the Magnificent Seven in which I am invested - a decision based on valuation, management quality, and future prospects.

Amazon’s robust and improving unit economics, diverse revenue streams, and proven ability to create lucrative new businesses make it unique. Add its relentless pursuit of innovation, and you have a company poised for long-term success.

For example, exciting initiatives like Zoox and Project Kuiper are pushing boundaries.

Never heard of them? Allow me to enlighten you. Let’s dive in.

Amazon Today

First, before looking at the future of this wonderful business, let’s consider Amazon as it is today.

Its e-commerce ecosystem thrives on principles of selection, price, and convenience, supported by robust advertising monetization. Yet, today, Amazon Web Services (AWS) is the crown jewel, driving both growth and profitability. It continues to lead the market in both e-commerce and cloud computing.

Amazon’s business segments highlight its evolving priorities. The international markets segment has shown positive momentum, while Amazon’s advertising business, a rapidly growing contributor to margins, has further diversified its revenue streams. Investments in emerging technologies like satellite connectivity and robotaxis provide additional growth opportunities, making Amazon a compelling choice for long-term investors.

Amazon’s capital expenditures reflect its ambitious plans to drive growth across several key areas: expanding AWS infrastructure, enhancing its fulfillment network, and venturing into future-focused technologies.

Existing Business Segments

• Amazon Web Services (AWS)

  AWS accounts for only 17% of Amazon’s total revenue but contributes an outsized 60% of its operating income, thanks to high-margin cloud services. Revenue from AWS is growing at approximately 19% annually (excluding forex impacts), driven by increased customer usage and innovative advancements in infrastructure. Amazon holds a 31% market share in the cloud computing space, making AWS a clear leader.

  Amazon has also made significant investments in artificial intelligence (AI) and machine learning. In 2024, it allocated $65 billion (+35% YoY) toward AI initiatives, including the development of new EC2 instances and chips for generative AI. The upcoming Trainium3 chips, expected in 2025, are designed to enhance AI workloads with greater computational efficiency.

  Additionally, AWS’s revised server depreciation policies have reduced amortization costs, improving its margin dynamics. As a result, AWS remains well-positioned to benefit from the growing shift toward AI workloads while sustaining its profitability.

• North America & E-Commerce Leadership

  The North American segment continues to drive Amazon’s core revenue, with aggressive pricing strategies and increasing adoption of same-day and next-day delivery services. These offerings grew by over 30% YoY, enhancing customer satisfaction and sales volume. Investments in robotics and automation within fulfillment centers are expected to improve margins by 240 basis points in FY24.

  In a strategic move to broaden its appeal and compete with platforms like Temu and TikTok Shop, Amazon launched Amazon Haul, a new discount storefront offering products priced at $20 or less. This initiative aims to capture budget-conscious consumers and expand Amazon's market reach. The launch of Amazon Haul also demonstrates the company's ability to adapt to changing consumer preferences and capture new market segments.

  There are only a few things people can’t buy on Amazon. Until recently, that included cars, but that is all about to change. Hyundai is the first OEM to sell its vehicles on the platform and others are expected to join throughout 2025. Since these are big ticket items that Amazon doesn’t need to store or deliver, it will generate revenues with very little by way of associated costs. The other nice aspect of this new business venture is that there is no downside risk for Amazon. If for any reason it fails, and people prefer to acquire cars from dealerships, what has Amazon lost? It’s a typical case of heads I win, tails I don’t lose.

  Whether car sales on Amazon are successful or not, one thing is clear, e-commerce is still evolving and has a long road ahead of it. In the third quarter of 2024, online sales accounted for 16.2% of total retail sales in the United States. This is the first time the percentage has crossed 16%. It may never reach 100%, but 16% looks very low to me and this number has been growing sequentially over the last 20 years, so there is no reason to believe that the trend will reverse anytime soon.

  Despite accounting for 60% of total revenue, the e-commerce segment contributes only 33% of operating income.

• International E-Commerce

  International markets make up 13% of Amazon’s revenue and around 7% of its operating income. This has huge scope to grow, but faces local competition, such as Mercado Libre in South America, Rakuten in Japan, Alibaba in China and Flipkart in India. However, this segment is showing positive momentum.

• Advertising

  The advertising business has emerged as a lucrative growth driver, with annual revenues exceeding $50 billion. Amazon’s ad solutions, such as Amazon DSP and AWS Clean Rooms, are increasingly popular among advertisers seeking high returns on ad spend (ROAS).

New Frontiers

1. Zoox Robotaxis

I know what you’re thinking - Waymo, Tesla and other companies are all pushing into the robotaxi space and Amazon is late to the game.

But you’d be wrong. While Elon Musk has been endlessly engaging in self promotion on Twitter, or X, making promises that he rarely keeps, Amazon has been working quietly behind the scenes for the best part of a decade on this project.

Amazon’s approach to robotaxis is not just incrementally better, it is fundamentally different. It hasn’t taken a normal car and adapted it for self driving - instead it has a purpose built space age carriage.

I encourage you to watch this video:

Amazon's Zoox robotaxi unit is poised for a significant breakthrough in 2025, with plans to launch commercial operations and expand its presence in the autonomous vehicle market. Zoox, acquired by Amazon for $1.3 billion in 2020, has been conducting trials of its specially designed robotaxis on public streets since early 2023.

The Zoox robotaxis are unique in their design, built from the ground up for autonomous operation without traditional controls like steering wheels or pedals. These vehicles feature centrally opening doors and seats arranged to face each other, prioritizing passenger comfort and safety.

Zoox plans to start offering public rides with an "Early Rider Program" in Las Vegas, followed by a general public launch later in the year. The company is also testing its vehicles in San Francisco and Foster City, California, with plans to expand to all other major U.S. cities by 2030.

If, within a few years, Zoox is readily available near you, which would you prefer, Zoox or Uber? Now consider that Uber has a $180 billion market cap which provides an idea of how much value Amazon may be able to capture with Zoox. None of this is included in the current share price.

2. Project Kuiper

Project Kuiper represents Amazon’s ambitious plan to deploy a low-Earth orbit (LEO) satellite broadband network with 3,236 satellites. This initiative aims to bridge the digital divide by providing affordable, high-speed internet to underserved regions.

Once again, I encourage you to watch this short video:

Kuiper is set to compete with SpaceX’s Starlink, yet Amazon’s disciplined and investor-friendly approach, together with the more considered approach of its leader, arguably gives it an economic edge:

• Elon Musk’s outspoken nature, particularly on social media, is costing SpaceX business. For instance, Taiwan, aims to bolster its mobile communications infrastructure against potential Chinese attacks, seeking a more secure satellite-based solution. Musk’s pro-China remarks on Taiwan’s sovereignty led Taiwan to reject Starlink entirely. Instead, Taiwan is negotiating with Amazon’s Project Kuiper, marking a significant win for Jeff Bezos and a missed opportunity for SpaceX.

• Musk’s approach at SpaceX which seems to leverage investors as a source of capital to fund his high-risk ventures. SpaceX’s costly projects, like the Polaris Program to test deep-space technologies and the Starship spacecraft for Mars missions, push innovation but lack any near-term commercial benefits, straining finances and risking shareholder dilution. More particularly, given his track record at Tesla, how likely is it that Musk will award himself another $50 billion bonus to bolster his personal wealth at the expense of shareholders?

  Bezos, on the other hand, known for his honesty and integrity, is shareholder friendly. He has the decency to separate his personal ambitions from the operations of Amazon. His space company, Blue Origin, reflects his passion for space exploration, which he is funding independently of Amazon. Project Kuiper, which promises commercial viability and shareholder returns, is being developed under the Amazon umbrella.

Although Kuiper is not yet profitable, it holds significant potential as another growth engine for Amazon. Consider that SpaceX is also far from being profitable, yet based on its most recent round of capital raising it has a post-money valuation of $360 billion. So what is Kuiper worth to Amazon? It currently isn’t included in the share price.

3. Alexa

Amazon's Alexa project struggled to achieve commercial success despite significant investment and widespread adoption. The company sold voice activated Echo devices at cost, expecting them to drive more Amazon purchases, but this strategy fell short.

Users primarily engaged Alexa for basic tasks like checking the weather or playing music, resulting in limited monetization potential.

It then attempted to monetize Alexa through partnerships for voice-activated purchases, such as ordering pizza or calling an Uber, but these also underperformed.

To date, Amazon's ‘Worldwide Digital’ group has consumed more capital on the Alexa project than it has produced from it and this resulted in the company deciding to pivot in an entirely different direction.

Now, Amazon aims to transform Alexa into an AI-driven chatbot companion. It has invested $4 billion in AI startup Anthropic, developers of Claude AI, and developed its own family of AI models, Nova, to make Alexa a more advanced, personalized assistant.

As of January 2025, Amazon has yet to launch the upgraded AI-enhanced Alexa and has not announced a release date. This could soon become another attractive revenue stream, adding to the value of Amazon.

The Numbers

Over the past decade, Amazon’s revenue has grown exponentially, from $88.99 billion in 2014 to $620 billion in 2024, with a CAGR exceeding 20%. Gross margins climbed from 22% in 2014 to 47% in 2024, driven by diversification into high-margin segments like AWS and advertising. This trend shows no sign of abatement.

The business successfully navigated the inflationary pressures and operational disruptions during the pandemic years and the numbers are very encouraging.

For the group as a whole, as high margin segments such as AWS and Advertising account for a larger share of total revenue, margins are expanding significantly.

Operating margins have averaged 8–10% since 2021, a significant improvement from the ~5% level of the past, reflecting efficiency gains achieved across all business units.

Over the past 12 months, revenue grew by 11.93%, bringing total revenue to an impressive $620.13 billion. Operating income also shone, with an EBITDA of $111.58 billion, reflecting operational efficiency at scale.

Projections for Amazon's financial performance suggest even brighter days ahead. Analysts forecast that Return on Capital Employed will rise from 15.6% in 2023 to 19.6% in 2024, while Return on Equity is expected to jump from 17.1% to 21.8%. Earnings per share (EPS) estimates are equally promising, with $5.26 projected for 2024, $6.35 for 2025, and $7.77 for 2026.

Top line growth combined with margin expansion has a multiplicative effect in terms of value creation for the company and, by extension, for its shareholders.

Management

Since Jeff Bezos transitioned to Executive Chair in 2021, Amazon has seen substantial leadership changes. Andy Jassy, the former CEO of AWS, now leads as President and CEO, focusing on strengthening Amazon’s technological and operational efficiency.

Bezos still provides guidance on strategy, product innovations, and company culture, leveraging his entrepreneurial vision for pivotal decisions without managing day-to-day operations. This allows him to focus on long-term initiatives such as project Kuiper, the satellite broadband project for global connectivity.

Operational responsibilities now fall to Andy Jassy, who worked alongside Bezos for two decades and has a similar ethos. This is how succession planning should be done. While Bezos was the mastermind behind the e-commerce operation and the evolution of the group as a whole, Jassy - the architect of AWS - was seen as the person better suited to lead the business into a new technological age.

Jassy has prioritized cost optimization, AI investments, and sustainability initiatives like zero-carbon operations.

Other key management figures include:

• Matt Garman (CEO of AWS) and Doug Herrington (CEO of Worldwide Amazon Stores), who continue to enhance operational efficiency and customer experience.

• Brian Olsavsky (CFO), ensuring financial stability and strategic growth.

• David A. Zapolsky, Amazon’s General Counsel, with an expanded focus since his promotion to Senior Vice President of Public Policy in 2023.

All of these people have been promoted from within and this highlights Amazon's focus on continuity and leveraging deep institutional knowledge to steer AWS into the future.

Corporate Ethos

Amazon has always operated on a customer first basis. It deploys the ‘scale economies shared’ strategy where cost savings are largely passed through to the consumer. It isn’t about maximizing short-term profit on each transaction - the aim is to optimize the lifetime value of each customer and keep growing its customer base.

Although Amazon is a mega-cap with a strong market position in many industries, it is not exploiting an oligopolistic position to the detriment of consumers - instead it is using its power for the benefit of customers.

This is a well managed business with an admirable set of values.

Turning Costs into Profits

Amazon has mastered the art of turning cost line items on its income statement into profit lines. A true stroke of genius!

AWS was born out of a need to reduce dependency on Oracle, becoming Amazon’s most profitable segment. Fulfillment By Amazon (FBA) turned logistics into a revenue driver. First-party e-commerce resulted in Amazon Marketplace for third parties, while Amazon Pay and Buy With Prime extended payment solutions into external markets. For instance, it allows Shopify merchants to integrate Amazon Prime benefits into their websites, boosting conversion rates by an average of 25%.

Now, two more success stories join this illustrious list: advertising and delivery logistics.

1. Advertising

Amazon’s advertising business is a behemoth, ranking third globally after Google and Meta, with an annual run rate of approximately $50 billion.

Through the Amazon Retail Ad Service, the company empowers online retailers to display ads across search, browse, and product pages. Retailers can customize ad formats, placements, and post-click actions - such as directing traffic to product pages or enabling instant product purchases.

This service is solely focused on revenue generation and operates on separate, secure systems, ensuring that retailer data remains independent from Amazon’s broader business operations.

2. Logistic-as-a-Service (LaaS)

In 2023, Amazon completed an astounding 7 billion same-day/one-day (SD1D) deliveries, cementing its position as a logistics powerhouse. During the pandemic, Amazon rapidly scaled its delivery network, building a regionalized sorting system and a last-mile transport network that rivals UPS. This not only slashed costs but also enhanced delivery speed and efficiency.

But Amazon didn’t stop there. Recognizing the economies of scale its network affords, Amazon began offering its logistics services to third-party businesses. Today, logistics is no longer just a means to serve its own customers - it’s a platform in its own right.

This enables businesses to ship orders (both on and off Amazon) at highly competitive rates using Amazon’s vast logistics network.

Amazon’s logistics dominance is evident in the numbers: 5.9 billion packages handled in 2023, representing 27% of U.S. parcel volumes. In fact Amazon now rivals USPS, having surpassed both UPS and FedEx.

Source: Pitney Bowes Parcel Shipping Index

Risks Facing Amazon

Amazon faces potential risks from new tariffs, such as those implemented by the Trump administration, which could affect its Gross Merchandise Volume (GMV) from international sellers. With Chinese-sourced goods comprising about 25% of GMV, these tariffs might lead to higher consumer costs and impact sales volumes. However, since all retailers face the same challenge, this doesn’t place Amazon at a competitive disadvantage.

The company also contends with intense competition across its sectors, from e-commerce and cloud computing to satellite internet and autonomous vehicles. Many of its rivals are equally well-funded mega-cap companies. Yet, Amazon's unique culture and customer-focused ethos have historically allowed it to thrive in competitive markets, a trend likely to continue.

As Amazon grows larger and more influential, regulatory scrutiny will increase. However, its “scale economies shared” approach benefits consumers by leveraging its size to drive cost savings, rather than exploiting its power at their expense. This strategy helps mitigate regulatory risks and reinforces its customer-first philosophy.

Valuation

Amazon has recently experienced a notable slowdown in revenue growth, which has declined from consistent rates of 20-30% annually to nearer 10% over the last two years. Bear in mind that most companies would love to see top line growth of 10%, this is far from bad news, but it is worth calling out.

The economic landscape over the past few years has presented challenges, such as inflationary pressures, a rising rate environment, a cost of living squeeze and overall economic uncertainty. In short, consumers have become more cautious with their spending, which is something seen across the economy and not specific to Amazon. Even at the enterprise level, companies have been tightening their budgets and, at least temporarily, cutting IT spending.

During the COVID-19 pandemic, Amazon saw a surge in online shopping demand that drove rapid revenue growth - 37.6% top line expansion in 2020. Essentially growth was pulled forward and so there has been an element of pandemic-driven growth normalization in the years that followed.

Growth rates are expected to climb again in the years ahead, but it should be noted that at some point scale becomes a headwind - it’s easy to double your customer base when you only have one customer, but far more difficult when you have tens of millions.

The final factor to consider has been the strength of the US Dollar which has negatively impacted Amazon's international revenues when accounted for in dollar terms.

The revenue growth slowdown has resulted in Amazon implementing significant cost reductions in various sectors, aiming to streamline operations and improve margins. Gross margins are better than ever, nearing 19% having averaged closer to 13% historically. Operating margins are nearing 10% having averaged closer to 5% in the past. Despite huge amounts of CAPEX spending to develop the projects discussed earlier, free cash flow margins are relatively unchanged at 7%, which is quite incredible.

All of this bodes well as revenues growth resumes on a business generating better margins.

So let’s think about how this might play out over the next five years:

• If we assume top line growth doesn’t recover and stays at 10%, then $620 billion of revenue becomes $1 trillion by 2030. If its profit margins are 8%, that’s $80 billion of earnings. Let us assume multiple contraction to 30x, that’s a $2.4 trillion valuation. If the company continues to reduce its share count at 1.5% annually, then there are 8.79 billion shares worth $273 each, discounted at 10% over the period suggests a fair value of $170 today. This is the bear case.

• If we assume that top line growth is restored to 20%, then by 2030 it is generating $1.543 trillion in sales. Let’s also assume that cost savings, efficiency measures and economies of scale generally push profit margins to 12% (remember that AWS, advertising and the other rapidly growing segments operate at much larger profit margins which are improving the group average significantly year on year), then we have $185 billion of earnings. Let’s keep the earnings multiple at 30x, which is well below the long term average, and we have an implied market cap of $5.6 trillion. On the same assumed 8.79 billion share count implies that the shares would be worth $632 each, discounted at 10% over the period suggests a fair value of $392 today. This is a bull case.

• If we take the arithmetic average of our bull and bear case, we are left with a fair value share price of $281 today, yet it trades at $225.

All of this is very rudimentary, back of the envelope type analysis, but it gives us a framework for how to think about valuing Amazon. To value it properly it needs to be broken out by segments, with assumptions tailored to each and then a group value may be derived on a sum of parts basis. It would also be necessary to make some big assumptions about the future valuations of Zoox, Kuiper and Alexa. In short, this is an incredibly difficult company to model and that work is well beyond the scope of this analysis.

However, I found it very interesting that my framework and approximate calculations lead me to a similar conclusion reached by Wall Street analysts.

I typically dismiss sell side analyst opinions as little more than white noise. However, when the consensus is overwhelmingly aligned, it’s worth taking notice. Out of 71 analysts covering the stock, over 90% recommend buying, with 18 of those expecting the stock to outperform.

• Morgan Stanley (January 13, 2025): $280 (Top Pick)

• JP Morgan (December 18, 2024): $280 (Buy)

• HSBC (January 13, 2025): $270 (Strong Buy)

• Truist Securities (January 14, 2025): $270 (Buy)

• Citizens JMP (January 10, 2025): $285 (Market Outperform)

• Evercore ISI (January 7, 2025): $260 (Outperform)

• Wedbush (January 6, 2025): $260 (Top pick)

• Barclays (LON:BARC) (December 19, 2024): $235 (Overweight)

• BMO Capital Markets (December 3, 2024): $236 (Outperform)

• Citi Research (November 15, 2024): $252 (Buy)

• Goldman Sachs (November 1, 2024): $240 (Buy)

• JMP Securities (November 1, 2024): $285 (Market Outperform)

Conclusion

Amazon’s success across a wide range of ventures is no coincidence. Much like Steve Jobs, Jeff Bezos employs a customer-first approach to innovation. Instead of developing a product or service and then trying to market it, Bezos begins by identifying customer needs and works backward to design a solution that directly addresses those needs. This strategy has been central to Amazon's consistent excellence.

Amazon remains a compelling option for long-term, growth-focused investors. Its leadership in e-commerce, cloud computing, and advertising, combined with innovative ventures like Project Kuiper, positions the company for sustained value creation. As AWS continues to grow, operating margins will expand, multiplying value for shareholders.

While past performance is no guarantee of future returns, Amazon’s track record of innovation, adaptability, and operational excellence suggests that its best days may still be ahead.