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In-Depth Equity Analysis: Amazon (AMZN)

Amazon: The Awakening Giant

1 Executive Summary

This report aims to deconstruct the core investment thesis of Amazon, Inc. We posit that Amazon's long-term value is not derived from any single business segment, but rather from a self-reinforcing "Flywheel Effect" system, powered by three core pillars. This structure is key to understanding its durable competitive advantages and valuation basis.

These three pillars are:

E-commerce with Unmatched Fulfillment: Through decades of heavy capital investment in its FBA (Fulfillment by Amazon) logistics system, Amazon has built a physical-world moat centered on 'speed' and 'certainty', delivering an unparalleled customer experience.

The High-Stickiness Prime Membership System: Acting as the ecosystem's 'glue', Prime significantly increases customer Lifetime Value (LTV) and switching costs by bundling diversified benefits, thereby locking in a high-quality consumer base.

The High-Profit AWS Cloud Computing: As the company's 'profit engine' and 'technological cornerstone', the massive cash flow generated by AWS not only funds the e-commerce segment's low-price strategy and long-term R&D but its own high growth and profitability also significantly boost the company's overall valuation.

This report will argue that the synergy between these three pillars creates a business model that is exceptionally difficult for others to replicate, forming the solid foundation of Amazon's investment value.

2 The Core Investment Thesis: The Flywheel Effect & Its Three Pillars

2.1 The High-Level Design: The Growth-Driving 'Flywheel Effect'

Amazon's business strategy and investment decisions can all be traced back to the classic "Flywheel Model" sketched by its founder, Jeff Bezos. This model reveals the company's internal causal loop of growth:

Attracting customers with lower prices and a wider selection of goods → Growth in customer traffic attracts more third-party sellers to the platform → An increase in sellers and product selection further improves the customer experience → The growing scale dilutes fixed costs (such as fulfillment centers and technology infrastructure) → Increased efficiency allows Amazon to offer even lower prices.

This flywheel is not a theoretical concept but Amazon's capital allocation blueprint. The company's massive, decades-long investments have the fundamental purpose of accelerating this flywheel. Understanding this is the starting point for evaluating the value of all of Amazon's strategic initiatives.

2.2 Pillar I: Unmatched Fulfillment — The Physical-World Moat

From an investment perspective, Amazon's hundred-billion-dollar scale investments in logistics and warehousing (FBA & AMZL) constitute its deepest and most inimitable moat.

Strategic Intent: The core purpose of this investment is not simply to 'deliver packages' but to master the 'fulfillment experience'. By building an end-to-end logistics network, Amazon transforms the core e-commerce pain points—delivery speed and reliability—into its absolute competitive advantage. The "same-day/next-day delivery" for Prime members is, in essence, a promise of ultimate certainty, bought with capital and technology.

The Moat Effect: This asset-heavy model creates formidable barriers to entry. While a competitor might replicate its website, it is nearly impossible to replicate a globally-scaled, deeply optimized physical sorting and delivery network in a short time. Furthermore, the FBA service deeply integrates third-party sellers into Amazon's ecosystem, transforming it from a mere marketplace into a 'business operating system' that integrates warehousing, delivery, marketing, and finance.

2.3 Pillar II: The Prime Membership System — The Digital Ecosystem's Glue

If FBA is the physical-world moat, the Prime membership system is the 'super glue' of the digital world. Its investment logic lies in maximizing customer Lifetime Value (LTV).

Value Lock-in: The core of Prime is its subscription model. Once users pay the fee, their spending behavior naturally centralizes on the Amazon platform to 'get their money's worth'. Data shows that Prime members' average annual spending is significantly higher than that of non-members.

Increasing Switching Costs: Amazon continuously 'enriches' Prime by bundling various digital services, such as streaming video (Prime Video), music (Prime Music), and reading (Prime Reading). This evolves Prime from a simple 'free shipping tool' into a high-value 'benefits package', drastically increasing the difficulty for users to churn. A user leaving Prime is not just leaving a shopping platform, but an ecosystem integrated into their daily entertainment life.

2.4 Pillar III: AWS — The Profit Engine and Technological Cornerstone

AWS (Amazon Web Services) is the key to understanding Amazon's financial health and strategic freedom. From an investment standpoint, AWS plays two critical roles:

Financial Engine: AWS is Amazon's 'cash cow'. With profit margins far exceeding those of the retail business, it contributes the vast majority of the company's operating income. This enormous, stable, and growing stream of cash flow provides the fuel for Amazon's entire flywheel: it allows the e-commerce business to maintain a long-term low-price strategy in exchange for market share while providing robust financial backing for FBA's heavy asset expansion and long-term R&D in cutting-edge technologies like AI.

Technological Cornerstone and Valuation Multiplier: The birth of AWS stemmed from the powerful internal IT infrastructure Amazon built to support its own e-commerce operations. This ability to transform an internal cost center into an external revenue stream is a core manifestation of Amazon's innovative culture. In terms of valuation, the market typically views AWS as a high-growth tech/SaaS business, assigning it a higher valuation multiple, which significantly elevates Amazon's overall market capitalization.

3 Business Model and Segment Analysis

Amazon's "Flywheel" is synergistically driven by several business segments with distinct financial and operational characteristics. Understanding the business model of each segment is crucial to dissecting the company's overall value. Based on its financial reporting structure and business substance, we can classify its core operations into three main categories: E-commerce Retail (North America and International), AWS Cloud Computing, and the cross-cutting Subscription and Advertising services.

3.1 E-commerce Retail: Driven by the Dual Engines of Scale and Efficiency

E-commerce retail is Amazon's origin and foundation, reported in its financials under "North America" and "International" segments. Its internal business model can be further broken down into first-party (1P) and third-party (3P) operations.

First-Party Business (1P - First-Party Sales):

Model: Amazon acts as a direct retailer, purchasing goods to hold in inventory and then selling them directly to consumers. This is analogous to a traditional "direct-sales" retail model.

Revenue Recognition: Revenue is recognized as the full sale price of the product.

Characteristics: This model is the foundation for building "The Everything Store" and ensuring that core products are in stock and competitively priced. However, it is asset-heavy, carries a very low profit margin, and requires massive investment in warehousing, logistics, and efficient inventory management. Its primary goal is to drive traffic and scale, rather than to directly generate profit.

Third-Party Seller Services (3P):

Model: Amazon provides a marketplace that allows third-party sellers to sell their products on its platform. Amazon collects commissions and various service fees in return.

Revenue Recognition: Revenue is recognized as service fees, not the Gross Merchandise Volume (GMV) of the goods sold. This primarily includes sales commissions, FBA (Fulfillment by Amazon) fees for warehousing and delivery, advertising fees, and more.

Characteristics: This is the profit core of Amazon's e-commerce business. The 3P model vastly enriches product selection (driving the "Selection" component of the flywheel) without Amazon having to bear inventory risk. The FBA service, in particular, deeply integrates sellers, transforming the platform from a simple marketplace into a business infrastructure provider. The profit margin of the 3P business is far higher than that of the 1P business.

Summary: The e-commerce strategy is to leverage the low-margin 1P business to attract a massive user base, and then achieve profitability and ecosystem lock-in through high-margin 3P services, especially FBA.

3.2 AWS Cloud Computing: The High-Profit Technology Engine

AWS (Amazon Web Services) is Amazon's profit center and technological cornerstone, with a business model entirely different from its retail operations.

Model: AWS provides a comprehensive suite of cloud computing services to businesses, governments, and individuals, including computing power (EC2), storage (S3), databases, machine learning, and the Internet of Things (IoT). Customers can use these services on-demand and pay only for what they use (a pay-as-you-go model).

Revenue Recognition: Revenue is recognized as the fees collected from customers for their use of cloud services.

Characteristics: 

High Growth & High Profit: AWS consistently maintains revenue growth rates and operating profit margins that are far higher than the company's overall average, characteristic of a top-tier tech/SaaS business.

Significant Scale Effects: As the global leader in cloud computing, its immense scale creates significant cost advantages, allowing it to continuously lower prices while maintaining high profitability.

Strategic Role: As outlined in Chapter 1, the massive cash flow generated by AWS provides the financial fuel for the expansion and innovation of the entire Amazon empire, serving as the fuel that allows the "Flywheel" to accelerate continuously.

3.3 Advertising Business: The Hidden Jewel of Value

Although Amazon reports advertising as a separate line item, its business is intrinsically linked to the e-commerce platform and serves as a high-growth profit engine within the retail segment.

Model: Amazon leverages the massive, high-intent shopping traffic on its e-commerce platform to offer advertising services to sellers and brands, primarily through "Sponsored Products" in search results. Advertisers typically pay on a cost-per-click (CPC) basis.

Revenue Recognition: Revenue is recognized as the click payments from advertisers.

Characteristics: 

Extremely High Profit Margins: Advertising is a digital business with virtually zero marginal cost, boasting profit margins comparable to those of Google and Meta.

High Conversion Rates: Unlike ads on social media, users on Amazon are searching with clear purchasing intent. This results in very high ad conversion rates and ROI (Return on Investment), making it highly attractive to sellers.

Growth Engine: The advertising business has become one of Amazon's fastest-growing segments. Its profit contribution helps offset the low margins of the 1P e-commerce business, significantly boosting the overall profitability of the retail segment.

3.4 Subscription Services: The Ecosystem's Glue

Subscription services, with the Prime membership at their core, are the "glue" that connects and strengthens all other business segments.

Model: Users pay a fixed annual or monthly fee in exchange for a bundle of services and benefits. The core benefit is "unlimited free shipping" for e-commerce, which is bundled with digital entertainment content like Prime Video and Prime Music.

Revenue Recognition: Revenue is recognized as the membership fees collected.

Characteristics: Its direct profit contribution is limited; its strategic value far outweighs its financial value. As mentioned earlier, Prime provides a powerful centripetal force for the entire flywheel by locking in high-value customers, increasing user LTV (Lifetime Value), and raising ecosystem switching costs.

4 Stock Catalysts and Recent Performance Analysis

Having analyzed Amazon's business model, this chapter aims to answer two core questions: 1) What are the potential catalysts that could drive Amazon's stock price higher in the future? and 2) Why has Amazon's stock performance recently lagged behind its peers in the "Magnificent Seven" (e.g., from 2023 to early 2024)? The answers to these questions will reveal the potential gap between current market perception and the company's underlying fundamentals.

4.1 Potential Stock Catalysts

We have identified three main categories of core catalysts that could significantly enhance Amazon's market value over the next 12-24 months.

Re-acceleration of AWS Growth Driven by AI:

Background: Over the past few quarters, AWS's growth rate has decelerated as enterprise customers focused on cost optimization. This optimization cycle is now showing signs of nearing its end.

Catalyst: The wave of Generative AI (GenAI) is fueling a new round of demand for cloud services. Enterprises require immense computing power to train and run AI models, and as the world's leading cloud infrastructure provider, AWS is a direct beneficiary of this trend. As businesses shift their focus from "optimizing costs" to "investing in AI," AWS's revenue growth is poised to re-accelerate. In particular, the growing adoption of its AI platform, Bedrock, and the application of its custom AI chips (Trainium/Inferentia) will further solidify its leadership and profitability in the AI infrastructure space.

Continued Expansion of Retail Profit Margins:

Background: Amazon's retail business has long been criticized for its low profit margins.

Catalyst: Company management is now focusing on profitability with unprecedented intensity. Key initiatives include: 

Regionalization of the Fulfillment Network: By dividing the U.S. into smaller, self-sufficient regions, Amazon has significantly reduced delivery distances and transportation costs. This is the most critical structural change driving margin improvement.

High-Growth Advertising Business: As previously discussed, advertising is a high-margin business. Its increasing share of revenue within the retail segment will directly lift the blended profit margin of the entire segment.

Once the market confirms that the retail business can sustainably generate meaningful operating profit, rather than merely breaking even, it will lead to a re-rating of the segment's value.

Market Re-evaluation of Sum-of-the-Parts (SOTP) Value:

Background: The market has historically tended to assign Amazon a blended valuation multiple that is heavily weighted towards its retail identity.

Catalyst: As the value of AWS becomes increasingly prominent in the AI era and the profit contribution of the advertising business becomes more transparent, investors may be compelled to re-examine Amazon using a Sum-of-the-Parts (SOTP) valuation methodology. Any event that encourages this shift in perspective—such as the company providing more granular segment disclosures in its financial reports or a shift in focus from Wall Street analyst reports—could act as a catalyst for "value discovery," thereby unlocking underestimated intrinsic value.

4.2 Analysis of Recent Stock Underperformance

Despite its solid fundamentals, Amazon's stock performance has been relatively subdued within the "Magnificent Seven." The reasons can be attributed to the focus of the market narrative and cyclical factors.

Differing Focus of the AI Narrative:

In the initial phase of the AI investment boom, the market directed its greatest enthusiasm towards the most direct "picks and shovels" play—NVIDIA—and the company that achieved early breakthroughs at the application layer and is deeply tied to OpenAI—Microsoft. In contrast, while AWS is the foundational bedrock of AI, its role was perceived as "infrastructure," making its story less "sexy" than the other two. The market temporarily overlooked the long-term reality that "all AI applications will ultimately run on the cloud."

Cyclical Headwinds in Core Businesses:

AWS Growth Deceleration: As mentioned above, the global corporate push for "cost efficiency" in 2022-2023 directly translated into reduced cloud spending, causing AWS's growth rate to fall to historic lows. This stood in stark contrast to the boundless possibilities presented by AI, suppressing the stock's performance.

Post-Pandemic Digestion Period for Retail: During the pandemic, Amazon over-invested in logistics and warehousing to cope with the surge in demand. In the post-pandemic period, the company entered a painful "digestion phase," facing excess capacity, high costs, and negative press from large-scale layoffs, which made the market anxious about its profitability prospects.

Lack of a "Star" AI Consumer Product:

Unlike Microsoft launching Copilot or Google integrating Gemini into its search engine, Amazon's flagship consumer AI product, Alexa, has appeared relatively quiet in the current wave of generative AI. It has failed to generate significant market excitement, making Amazon seem like a follower, rather than a leader, in the race to bring AI to the average user.

Conclusion: Amazon's recent stock underperformance is primarily due to temporary factors such as the market's narrative focus and cyclical business headwinds. However, these factors are beginning to reverse. As AWS regains growth momentum, retail margins improve, and the market's understanding of the long-term value of AI deepens, the potential catalysts for stock price appreciation are gathering strength. This presents an excellent entry point for value-oriented investors.

5 Risk Analysis

Despite Amazon's strong fundamentals and multiple growth catalysts, investors should remain aware of the following potential risks that could impact the company's future performance:

1 Regulatory and Antitrust Risk
As a global technology giant, Amazon faces continuous and stringent antitrust scrutiny in its key markets, including North America and Europe. Regulators are focused on its market dominance, policies concerning third-party sellers, and data usage practices. The potential for substantial fines, forced adjustments to its business model, or even pressures to break up the company represents a significant long-term uncertainty.

2 Intensifying Competition
Each of Amazon's core businesses confronts formidable competition. AWS is in a heated battle with Microsoft Azure and Google Cloud in the cloud and AI sectors. The e-commerce retail business faces challenges from both traditional and emerging rivals like Walmart and Shopify, as well as from low-cost cross-border platforms such as Temu and Shein.

3 Macroeconomic Headwinds
Amazon's retail and cloud businesses are sensitive to the macroeconomic cycle. An economic recession or a slowdown in consumer spending would directly impact its e-commerce sales. Similarly, enterprises seeking to cut costs could once again slow their spending on AWS, affecting its growth prospects.

4 Execution Risk in AI Strategy and Logistics Optimization
There is execution-level uncertainty regarding whether AWS can maintain its lead over Azure in the AI wave and whether the regionalization reforms in the retail logistics network will successfully achieve their intended cost reduction and efficiency goals. Any strategic missteps could undermine the company's core growth and profitability narrative.

5 Labor Relations and Operational Cost Pressures
Unionization movements among warehouse and logistics employees globally could lead to increased labor costs and reduced operational flexibility. Furthermore, fluctuations in operational costs, such as fuel prices and wage levels, can directly impact the profit margins of the retail business.

Disclaimer:

The Information presented above is for information purposes only, which shall not be intended as and does not constitute an offer to sell or solicitation for an offer to buy any securities or financial instrument or any advice or recommendation with respect to such securities or other financial instruments or investments. When making a decision about your investments, you should seek the advice of a professional financial adviser and carefully consider whether such investments are suitable for you in light of your own experience, financial position and investment objectives. The firm and its analysts do not have any material interest or conflict of interest with any stocks mentioned in this report.

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