Not Prime. Not Delivery. This Business Holds the Key to Amazon's Future.
Key Points
AWS's growth rate and profitability far exceed those of its commerce siblings.
Amazon is investing hundreds of billions into AWS to seize an opportunity.
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Amazon (NASDAQ: AMZN) is one of the best-known companies in the world. Very few people in the U.S. have not ordered anything from Amazon, and many use it as a primary source for goods. It has an incredible delivery infrastructure. But none of these are great reasons to buy Amazon stock.
Instead, I think the best bet for Amazon's future success as an investment comes from Amazon Web Services (AWS), its cloud computing division. There are several reasons to like AWS, and I think it's by far the biggest growth driver Amazon has now.
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What is AWS?
AWS is a pretty simple business: Amazon builds excess computing capacity, then rents it out to clients at a profit. That's a simple explanation for a complex business, but it has been key to Amazon's profitability in recent years.
Commerce businesses have notoriously razor-thin margins. This makes creating a highly profitable business in this segment difficult, although Amazon has done as good a job as any in this space. In the second quarter, Amazon's North American commerce division generated $116.2 billion in revenue and converted $9.1 billion of that into operating income. Good enough for a 7.8% operating margin.
AWS blows that figure out of the water. It's a far more profitable business, and in Q2 it generated $42.2 billion in revenue but converted $16.6 billion of that into operating income for a margin of 39.3%. So despite being a smaller segment by revenue, AWS generates far more profits. In fact, AWS generated about 60% of operating income in Q2 despite making up only 21% of sales.
With the AI build-out going on at full speed, Amazon is heavily investing in AWS computing capacity, spending $220 billion on capital expenditures in 2026. This will lead to faster AWS growth, which will make AWS a greater part of Amazon's business.
AWS grew at 37% in Q2, versus North American commerce's 16% and International's 15%, so this trend is already evident. When the most profitable business segment is growing the fastest, it also helps boost margins faster. This is why Amazon's operating margins have dramatically increased over the past few years.
AMZN Operating Margin (TTM) data by YCharts
This trend will likely continue into the future, and I think that makes Amazon stock a top one to buy, as the Amazon of three years from now will look far different and more compute-centric than the Amazon of today.
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Keithen Drury has positions in Amazon. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.
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