Amazon: everything lies in the margins

The fastest growing revenue segments are the highest margins, and it continues to shed low margin retailing - with approximately 70% of goods sold on Amazon these days being 3rd party sales. 

As far as I see it AWS is already the largest cloud provider and has been for awhile - if the hyperscalers are right and AI is a cash cow once the DCs are online then it stands that AWS will be at the top of the podium - GCP, with their own pretty decent model offerings will be a fierce competitor, but most shops are just gonna stick with the cloud infrastructure they already have deployed since from a capability perspective there really isn’t much difference across the board. I think Leo, One Medical, Zoox and some of the other big bets they have are really worthwhile although they each have their own bull/bear cases. Leo is an absolute game changer if they can monetize and market it right and since starlink has demonstrated the value the risk associated with it is purely on the balance sheet side and I’m pretty confident it will be able to operate with fairly healthy margins if they can win defense and airline and shipping customers. Zoox is a bit behind Tesla and quite a bit behind Waymo, but this isn’t a winner take all industry and frankly Waymo is handling all the legislative nightmares and rolling out the proverbial red carpet for other entrants. The one medical and Amazon pharma pieces are where I’m a bit skeptical just because the number of players who have come in saying they are gonna fix the industry is too many to count and every year the situation appears to deteriorate further.

With rounding AlphabeAWS will be at the top of the podium ... GCP, with their own pretty decent model offerings will be a fierce competitor, but most shops are just gonna stick with the cloud infrastructure they already have deployed since

In the latest quarter (26Q2), AWS has the lowest revenue growth rate among the Big 3 (37%, vs. Google Cloud's 82% and Azure's 43%) and, with rounding, Google Cloud has the same amount of dollar growth as AWS ($11.1bn vs. $11.4bn).

RIP circle of competence

Your three outputs are exactly linear: 149.58, 202.18, 254.77 is +52.6 each step, so the model is worth about $10.50 a share per point of terminal operating margin. Once you notice that, the DCF isn't really giving you a fair value, it's converting a margin guess into a price. I'd invert it instead. Take today's price, keep the 3x revenue, and solve for the operating margin that's implied. Then you only have one number to argue about, and you can ask whether it's a margin the business has ever been near. The other issue is that your two assumptions pull against each other. Tripling revenue means most of the incremental dollars come from retail and international, which are the thin-margin parts, while the 30% case only works if AWS and ads dominate the mix. You can't really have both in the same scenario, so I'd run the segments separately with their own growth and margin rather than one blended number. And with capex where it is right now I'd anchor on FCF instead of operating margin anyway. They've revised server depreciation assumptions more than once, and that moves reported margin on its own without anything changing in the business.

AWS was $128.7b of the $716.9b of net sales last year, and $45.6b of the $80.0b of operating income. So 18% of revenue and 57% of the profit. Consolidated operating margin was 11.2%, North America around 7%, international under 3%. The bit I would push on is that your growth input and your margin input are not independent. If revenue triples and the mix holds, AWS is still 18% of the top line and the blended margin barely moves. Getting to 30% consolidated needs cloud and ads growing a lot faster than retail, which is a different assumption from 3x overall. Also your 20% case is already close to double last year's consolidated margin.

Slop. The DCF that uses a 0.5x higher margin produces a NPV that is \~0.5x higher. So what?