Amazon increasingly sensitive to AWS performance

By Sam Boughedda

William Blair analysts maintained an Outperform rating on Amazon (NASDAQ:) in a note on Wednesday, telling investors that the shares are increasingly sensitive to the performance of AWS.

“Following the report and the first-quarter guide, investors are on edge around the margin profile of Amazon, making shares increasingly sensitive to the performance of AWS—the only division still making money,” they said.

The analysts said the firm’s analysis found that the retail segment cost of Amazon’s goods, technology and content, and music and video were the largest contributors to margin weakness last year, not higher shipping and fulfillment costs as the company’s management suggested.

“Management is laser-focused on improving the efficiency of the business following larger cost-cutting initiatives, which should slow the pace of deleverage across other operating cost items,” they added. “Combined, assuming the Street is close on its revenue assumptions, which we believe are relatively conservative, we find that there is combined upside to total company operating income of close to 40% over the next two years as cost items move back toward relatively consistent historical patterns.”

On Amazon Prime, the analysts concluded that historically, membership revenue has “turned the retail and media business from running at consistent losses to a healthier low-single-digit GAAP operating margin business.”

“We find that even before accounting for more recent additions, Prime offers exceptional value, equal to roughly 2.5 times the current annual cost to the consumer.”