AMZN Stock: This Catalyst Will Continue To Drive Amazon.com Inc. (AMZN) Stock Higher

  • Amazon’s top line is already at $30+ billion per quarter and has grown at a 30% rate in the YTD.
  • Exemplary performance by AWS will ensure bottom line stability.
  • Using AWS, Amazon can take more risks to grow retail operations.
AWS Success Will Help Amazon.com Inc. (AMZN) Stock To Power Higher
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Amazon.com's (NSDQ:AMZN) double digit growth story continues to stay in trend despite the company’s top line increasing in the tens of billions each year. Amazon’s annual revenue has grown around the 20% level in the last three years, and during the first nine months of fiscal 2016, Amazon’s total revenue has shot up from $71.259 billion last year to $92.246 billion this year, a growth of  29.45%. Top line growth has indeed accelerated despite the fact that the retailer's quarterly revenues are coming in at above the $30 billion mark.

To grow at above 20% when your sales are more than $30 billion per quarter is no mean achievement, and to do that when you are operating in a highly competitive environment is even more difficult. (See also: Does Amazon.com (AMZN) Have Enough Fuel To Drive The Stock Above $1000 A Share?)

Expect Strong Bottom Line Support from AWS

Amazon’s sales come from three segments: North America Retail, International Retail and Amazon Web Services.

Amazon Web Services, the company’s cloud offering, has been growing at above 50% levels. During the third quarter of the current fiscal, AWS ($3.231 billion) accounted for nearly 10% of their overall revenues ($32,714 billion). As the clear leader of the cloud infrastructure segment, Amazon will be expecting this unit to continue on its growth path and possibly reach $20 billion dollars in annual sales in the next few years. Microsoft is targeting to hit $20 billion from its cloud  business by 2018, so Amazon is definitely going to do all it can to get there before them.

Microsoft Corp is targeting $20 billion in annual revenue from its cloud-computing businesses by the end of fiscal 2018, Chief Executive Satya Nadella said on Wednesday, signaling a tripling of such revenue in three years.” - Reuters

AWS is a huge bonus package for Amazon. It provides the company with a lot of room to move things around as it is extremely profitable, with operating margins staying north of 20%. In the third quarter of this year AWS operating income came in at $861 million for total sales of $3.231 billion, an operating margin of 26.64%. If we assume Amazon’s AWS to hit $20 billion in annual sales by the end of 2018, a margin of 20% will give them a cool $4 billion dollars of operating income.

Amazon’s total operating income for full year 2015 was $2.23 billion, the highest in the company’s history. If AWS can give them such a fat pile of operating income, which it should, it will allow Amazon to plunge neck deep into improving its retail division and run it at cost if necessary, ploughing back all the money to grow sales numbers in the North American and international markets. (See also: Will Trump Victory Send Amazon.com Inc. (AMZN) Stock To $600 A Share?

Retail Top Line is What Amazon is After

Amazon has never shied away from just about breaking even, and the company clearly gives more importance to cash flow and sales numbers instead of margin numbers. The company’s forecast for fourth quarter operating income is a wide range of 0 to $1.25 billion compared to the $1.1 billion the company posted in the prior period.

Source: Amazon Q3 Press Release

AWS, with its growth and profitability, is only going to make Amazon take even more risks on the retail front as it can guarantee them some safe bottom line numbers. That's a scary proposition for retailers who are competing with the company. As it stands, we can now expect an onslaught of services flowing from the Amazon Prime factory all over the world as the company tries to lock in as many members in its fold as possible. Prime is their gateway to user growth, and now AWS is the perfect foil for Amazon to push its Prime agenda even harder.

It’s going to be an interesting fourth quarter for Amazon with the holiday season underway, major plans for Black Friday and the introduction of Voice Shopping on its Amazon Echo devices featuring Alexa, the AI-based virtual assistant. Amazon is clearly putting all its bets on U.S. retail this quarter, and we should see some very interesting numbers when they announce their Q4-16 earnings early next year.

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