Investment Memo: AMZN

1. Executive Summary

Amazon is at a pivotal inflection point. After a period of heavy investment and margin compression, the company is poised to reap the benefits of its scale and diversification. The market is currently underappreciating the margin expansion potential in the North American retail segment, the re-acceleration of AWS growth driven by AI, and the burgeoning, high-margin advertising business. We believe the combination of these factors will drive significant earnings growth and a re-rating of the stock. Our "Empire Strikes Back" thesis is predicated on Amazon leveraging its vast infrastructure and AI capabilities to solidify its dominance and unlock new avenues of growth, leading to a target price of $250, representing a 35.1% upside.

2. The Scoreboard

3. Business Overview

Amazon operates a diversified business model, broadly categorized into three segments: North America, International, and Amazon Web Services (AWS).

• North America & International: This is the company's core e-commerce business. It includes online and physical stores, third-party seller services, advertising services, and subscription services like Amazon Prime. Revenue is generated through product sales, commissions from third-party sellers, advertising fees, and subscription fees. The North America segment accounted for 59% of revenue in Q3 2025, while the International segment contributed 23%.
• Amazon Web Services (AWS): AWS is the world's leading cloud computing platform, offering a vast array of services, including computing, storage, databases, analytics, machine learning, and Internet of Things (IoT). AWS generates revenue through a pay-as-you-go model, where customers are billed based on their usage of the services. AWS accounted for 18% of revenue in Q3 2025 and is the company's most profitable segment, with a 34.6% operating margin.

The Moat (Competitive Advantage)

Rating: Wide Source: Network Effect, Cost Advantage, Intangible Assets

Amazon's moat is exceptionally wide and durable, built on a foundation of several reinforcing competitive advantages. The company's massive scale and fulfillment network create a significant cost advantage, allowing it to offer low prices and fast delivery times that are difficult for competitors to match. This, in turn, attracts more customers, which attracts more third-party sellers, creating a powerful network effect. The vast selection of products available on Amazon's platform further enhances this network effect.

Furthermore, Amazon's brand is a significant intangible asset, synonymous with convenience, selection, and value. The company's culture of innovation and customer obsession has fostered a deep level of trust and loyalty among its customer base. Finally, AWS benefits from high switching costs, as it is complex and costly for customers to migrate their infrastructure to a different cloud provider.

4. The Investment Thesis

Our long thesis on Amazon, "The Empire Strikes Back," is based on three key pillars that we believe the market is underappreciating:

Point 1: North American Retail Margin Expansion

For years, Amazon has been in a heavy investment cycle, building out its fulfillment network and logistics capabilities. This has suppressed margins in the North American retail segment. However, we are now at an inflection point where these investments are starting to pay off. The company is realizing significant efficiency gains in its fulfillment network, leading to faster delivery times and lower costs. We expect this to drive meaningful margin expansion in the coming years. The Q3 2025 results already show early signs of this, with North America operating income reaching $4.8 billion.

Point 2: AWS Re-acceleration Driven by AI

AWS, the profit engine of Amazon, is experiencing a re-acceleration in growth, driven by the explosive demand for AI and machine learning services. The company is a key enabler of the AI revolution, providing the foundational infrastructure and services that power the next generation of AI applications. The launch of custom AI chips like Trainium2 and partnerships with leading AI companies like Anthropic position AWS as a critical player in the AI ecosystem. We believe the market is underestimating the long-term growth potential of AWS as AI adoption continues to accelerate.

Point 3: The Burgeoning, High-Margin Advertising Business

Amazon's advertising business is a hidden gem within the company. It is a high-margin, fast-growing segment that leverages the vast amount of customer data Amazon possesses. The company's advertising services allow sellers to reach a highly engaged audience with strong purchase intent, making it a very effective advertising platform. The recent partnerships with Netflix, Spotify, and SiriusXM further expand the reach of Amazon's advertising network. We believe the advertising business will be a significant driver of profit growth for Amazon in the coming years.

Variant Perception (The "Edge")

Consensus View:

Our View:

5. Financial Deep Dive

Amazon's financial performance in Q3 2025 was impressive, with revenue growing 13% YoY to $180.2 billion. This was driven by strong growth in all segments, with AWS re-accelerating to 20% YoY growth. The company's profitability is also improving, with operating income reaching $17.4 billion.

• Revenue Quality: A significant portion of Amazon's revenue is recurring, driven by Prime subscriptions and AWS usage. This provides a stable and predictable revenue stream.
• Unit Economics: The company does not disclose specific unit economics, but the increasing profitability of the North American retail segment suggests improving unit economics.
• Capital Allocation: Amazon has historically prioritized reinvesting its cash flow back into the business to drive growth. The recent increase in capital expenditures is a testament to this strategy, as the company invests heavily in its AI infrastructure.

6. Valuation

Methodology: Sum-of-the-Parts (SOTP)

We believe a Sum-of-the-Parts (SOTP) valuation is the most appropriate methodology for Amazon, given the distinct nature of its business segments.

• AWS: We value AWS at 20x EV/EBITDA, a premium to its peers, given its market leadership and strong growth prospects. This yields a valuation of $2.8T.
• North America & International Retail: We value the retail business at 1.5x EV/Sales, in line with its historical average. This yields a valuation of $1.1T.
• Advertising: We value the advertising business at 25x EV/EBITDA, a premium to its peers, given its high growth and margins. This yields a valuation of $0.5T.

Our SOTP analysis yields a fair value estimate of $250 per share, representing a 35.1% upside from the current price.

7. Pre-Mortem (Risks)

1. Regulatory Scrutiny: Amazon faces increasing regulatory scrutiny in both the US and Europe. A significant antitrust lawsuit could force the company to break up or change its business practices, which would negatively impact the stock. (Probability: Medium)
2. Competition: The e-commerce and cloud computing markets are highly competitive. Increased competition from players like Walmart, Microsoft, and Google could pressure Amazon's market share and margins. (Probability: Medium)
3. Macroeconomic Headwinds: A significant economic downturn could negatively impact consumer spending and demand for AWS services, which would hurt Amazon's revenue and profitability. (Probability: Low)

8. Conclusion & Action

We recommend a long position in Amazon with a price target of $250. The company is well-positioned to benefit from the secular growth trends of e-commerce, cloud computing, and AI. We believe the market is underappreciating the company's long-term earnings power, and we see a clear path to a higher stock price as the company executes on its strategy.

Disclaimer: Internal research only. Not financial advice.