Amazon’s Moat Reinforced in the Cloud

With strong AWS segment profits, this leads to natural questions about the profitability of Amazon's e-commerce business, especially after stripping out the benefit from ancillary services like advertising. Still, with Amazon's high-velocity business model, we view North America segment margins of 3.9%%--up 120 basis points year over year--as healthy and consistent with our longer-term assumptions. Like previous quarters, much of the increase appears to be the result of Prime memberships and third-party units, which increased 32% and now constitute 44% of units sold. In our view, these trends signify a migration of buyers and sellers away from competing platforms, indicating a strong network effect.

We're only planning a modest increase to our $415 fair value estimate, as our outlook for low-double-digit average annual top-line growth and GAAP operating margins growing to 4.5% (6.0% adjusted) over the next five years is intact. The shares are trading above our fair value, but we would encourage investors to keep an eye out for any undue pressure as we head into traditionally the heaviest investment quarters of Amazon's fiscal year.

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