Most people think of Amazon as a tech business which is no surprise, but it still sold ~$US158bn worth of goods last quarter, making up more than 70% of its revenue and affording it the title of the largest retailer in the US. However, while the retail arm is enormous in revenue terms, it’s only relatively modest when looking at the contribution to overall profit. The real margin story is Amazon Web Services (AWS) and advertising. Retail is essentially the flywheel that keeps hundreds of millions of customers inside the Amazon ecosystem, so the cloud and ad businesses can monetise them. Without the retail habit, AWS and advertising are just two more tech businesses competing in a crowded market.
The retail business is cyclical and consumer-exposed. But AWS and advertising are effectively tech businesses with additional structural growth tailwinds. Amazon is planning to invest $200 billion in capital expenditure in 2026, predominantly into AWS and AI Variety, which tells you everything about where management thinks the real future of the business lies.
- Amazon sells you stuff to get you in the door, then makes its real money renting you the cloud and selling your attention to advertisers – it’s not too dissimilar from how Eagers makes money selling financed cars, just a larger scale!
Amazon is the opposite to a traditional retailer like Walmart in capital allocation terms. Where mature consumer staples companies return cash to shareholders through buybacks and dividends, Amazon ploughs everything back in. CEO Andy Jassy put it plainly, “as fast as we are installing AI capacity, it’s getting monetised”, which is management’s way of saying they’d rather build a $200 billion infrastructure empire than hand cash back to shareholders in dividends &/or buybacks. For investors, the “bet” is that the future returns from AWS and AI will dwarf what any buyback program could deliver today.
AWS is the reason Amazon’s stock trades like a tech company despite being classified as a retailer — it’s a toll road on the entire digital economy, and AI is about to make the traffic much heavier.
- We can see AMZN challenging $US300 through 2026 as the US tech goliaths continue to power ahead.
MM is bullish towards AMZN around $US250
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