AWS, Logistics to Drive Amazon for Years to Come

Business Description:

Amazon primarily operates in e-commerce, web, and digital services. They provide cloud computing solutions through their subsidiary, AWS, and manage e-commerce and digital services through Amazon Prime, Prime Video, and Audible. Amazon manages numerous other smaller subsidiaries as well.

Investment Thesis:

Strong investment in AWS AI services, along with consistent growth and expansion into emerging markets positions Amazon as a strong long-term buy. AWS is perhaps Amazon's most valuable asset, representing 17% of total operating revenue, but driving 60% of total operating income. Amazon maintains that high profitability at such a large scale, allowing for Amazon to reinvest heavily into itself while maintaining high profitability. Amazon Advertising, operating at margins of 50 to 70%, represents an increasingly significant high-margin revenue source, providing a durable and growing profit stream independent of AWS. In e-commerce, Amazon’s rollout of retail automation is expected to save between $4 billion and $9 billion annually for e-commerce operating expenses, all while e-commerce revenues are expected to steadily increase. Amazon’s strong network effect between e-commerce, web services and retail will only compound and increase efficiency between Amazon’s services. Furthermore, Amazon's expansion of logistics networks, such as Amazon Supply Chain Services reduce unit costs, while monetizing excess capacity.

Moat Source:

Amazon has numerous powerful moats, including network effects, unreplicable physical supply chains, and the Amazon Prime network. Amazon has many network effects, including marketplace effects from e-commerce, data network effects from user data collection from Amazon’s services, and logistics and supply chain networks. An argument can be taken that Amazon has the largest and most comprehensive network out of any company, a network that is supported by decades of user data, the world's largest fulfillment network, a leading Cloud computing network and infrastructure, and a large digital subscription network. All of these moats rely on billions of dollars of user data and physical infrastructure that cannot be meaningfully replicated by competitors. Additionally, Prime video serves as an incentive to stay within the Amazon Prime ecosystem. With roughly 88% of prime video viewers being active amazon shoppers, it promotes and bridges the connection between prime video and e-commerce.

Key Financials (FY2025):

• —Revenue growth YoY - 12.38%
• —Gross margin - 50.3%
• —Free cash flow margin - 1.6% (heavily suppressed by recent high Capex)
• —ROIC - 13.0%
• —Net debt - $29.8B

Valuation:

Amazon has an EV/EBITDA of 13.3x as of May 1 2026, compared to a five year average of 22.2x. While this may be discounted, Amazon’s low current multiple compared to its 5 year average is directly representative of high Capex spending and the expected downturn of FCF. The market is pricing Amazon by speculating total performance being reliant on the slower-growing e-commerce platforms, while being speculative of returns in high-margin and quickly growing AWS and retail services. High investment in AI infrastructure carries risk with it, and until the market sees promising financials, such as revenue growth and margin expansion in AWS, P/E and EV/EBITDA will stay suppressed.

Primary Risk:

The assumptions that Amazon will find future growth relies largely on the continued growth of AI and AI infrastructure. Amazon's high infrastructure investments are betting that generative AI in relation with its global supply chain will yield massive returns.

Catalyst:

Continued developments and demand in cloud computing and generative AI will allow for AWS to fully capitalize off of its recent investments such as custom computer chips, driving AWS margins higher. Looking at AWS revenue and margins during FY2026 Q2 and Q3 investor reports will give an early snapshot into if the investments Amazon is putting into cloud computing are returning significant value. Backlog growth will also be an indicator of future growth, as increases in backlog growth would utilize the need for the newly constructed infrastructure.

Sell Trigger:

Monitoring the spread between ROIC and WACC allows for a determination to be made if Amazon’s heavy investment into AI cloud infrastructure is paying off. If ROIC spread declines for three consecutive quarters, a sell will be triggered.