Amazon Is an E-Commerce Beast, but This Much Smaller Segment Makes Up 60% of Its Operating Profit
Amazon's e-commerce business generates significant revenue, but its operating profit largely comes from Amazon Web Services (AWS), which accounted for 60% of its operating income. AWS sales rose 19% in the September quarter, totaling $24.5 billion, with an operating margin of 38.1%. As the cloud computing market is expected to grow significantly, AWS is poised for further profit growth. Despite antitrust concerns, Amazon's stock has risen 35% this year, and its current valuation may present a good buying opportunity for investors.
When most people think of Amazon (AMZN -4.19%), it's the company's vast e-commerce business that comes to mind. That is, after all, what generates the bulk of its revenue. But to compete on price with other retailers (both online and brick-and-mortar stores), its margins need to be razor-thin. And that means its profits from that area of its operations aren't huge.
Even though the company generates hundreds of billions of dollars in revenue thanks to its online stores, it's a much smaller segment of its business that brings in the lion's share of its operating profit. It's also the segment that growth investors are often most excited about: Amazon Web Services (AWS).
AWS's strong margins help fuel the company's bottom-line growth
Amazon's cloud computing business, AWS, is a key part of the company's growth. But what may surprise you is that it's an even more important part of its bottom line.
AWS sales rose by 19% in the September quarter, totaling $27.5 billion. That represents approximately 17% of the company's total revenue for the period -- $158.9 billion. And thanks to its fantastic margins, AWS played a huge role in growing the company's operating profits.
Here's a breakdown of Amazon's main segments, and how they performed last quarter.
| Segment | Revenue | Revenue Growth | Operating Income | Operating Margin |
|---|---|---|---|---|
| North America | $95.5 billion | 8.7% | $5.7 billion | 5.9% |
| International | $35.9 billion | 11.7% | $1.3 billion | 3.6% |
| AWS | $27.5 billion | 19.1% | $10.4 billion | 38.1% |
Data source: Amazon earnings report. Table by author.
The company's North America and International segments primarily reflect e-commerce, advertising, and subscription revenue from those parts of the world, whereas AWS is comprised mainly of its cloud computing and storage operations.
Overall, Amazon's operating income rose by 56% year over year, to $17.4 billion. And of the $6.2 billion increase, $3.5 billion of that was due to AWS.
More growth opportunities ahead for AWS
In the future, AWS is likely to play an even large part of Amazon's overall operations, due to the massive opportunities that lay ahead in cloud computing. As more businesses conduct their operations in the cloud and work on developing next-gen technologies, the need for a trusted cloud platform will remain high. And AWS has a leading market share among cloud platforms, proving to be even more popular than Microsoft Azure and Alphabet's Google Cloud.
According to analysts at Grand View Research, the global cloud computing market will be worth nearly $2.4 trillion by 2030 -- more than three times its size right now ($752 billion). For Amazon, this means there is going to be room for much more profit growth on the horizon for the business. Growing its cloud business at a fast rate is more crucial than expanding its lower-margin e-commerce operations.
Should you buy Amazon stock today?
Shares of Amazon have risen by around 35% since the start of the year as of this writing. While there are looming antitrust concerns around the business that can create some uncertainty for investors, it can be difficult to predict how those issues will play out, and they don't appear to be weighing down the stock -- nor should they at this stage.
But regardless of what happens on that front, Amazon looks to continue to be a growth beast for the foreseeable future, as it is growing on multiple fronts. AWS is a huge part of its business and success, and with strong margins, its growth can enable the business to rise to a higher valuation in the long run, given the plentiful opportunities which exist in cloud computing.
At a forward price-to-earnings multiple of 34 (based on analyst expectations), the stock is trading at a cheaper premium than what it has averaged in the past, meaning now can be an excellent time to add it to your portfolio.