Amazon’s Profit Drivers: AWS and Advertising Lead the Way
Amazon (NASDAQ: AMZN) is often misperceived as primarily an e-commerce platform. While many use the service regularly, its e-commerce segment doesn’t significantly drive profits.
This perspective makes worries over potential China tariffs misplaced. Amazon’s profitability lies within other business areas that remain robust.
AWS Dominates Amazon’s Operating Profits
To understand Amazon’s revenue sources, let’s analyze its revenue breakdown.
| Segment | Q1 Revenue | YOY Revenue Growth | Percentage of Total Revenue |
|---|---|---|---|
| Online stores | $57.4 billion | 5% | 37% |
| Third-party seller services | $36.5 billion | 6% | 23% |
| Amazon Web Services (AWS) | $29.3 billion | 17% | 19% |
| Advertising services | $13.9 billion | 18% | 9% |
| Subscription services | $11.7 billion | 9% | 8% |
| Physical stores | $5.5 billion | 6% | 4% |
| Other | $1.3 billion | 4% | 1% |
Data source: Amazon. Note: YOY = Year over Year. Percentages may not sum to 100% due to rounding.
Online stores and third-party seller services combined account for a large share of Amazon’s revenue.
However, the story changes when we examine operating profits. AWS alone contributed 63% of operating profit in Q1, boasting an operating margin of 40%, whereas Amazon’s overall margin stood at 12%. As long as AWS performs well, Amazon’s profitability outlook remains solid. AWS’s 17% growth this quarter signals a positive trend, especially with cloud computing being crucial for artificial intelligence (AI) infrastructure.
In the AI sector, many companies rely on providers like AWS to access high-powered computing without maintaining their own data centers. Current demand continues to exceed capacity, and tariff worries are unlikely to dampen this demand.
Advertising Emerging as a Key Revenue Stream
Amazon’s advertising division is its fastest-growing segment, with revenue increasing 18% year over year in Q1. While Amazon does not publicly disclose the operating margin for this segment, comparing it to other major tech companies offers insights.
Alphabet (NASDAQ: GOOG) and Meta Platforms (NASDAQ: META) primarily rely on advertising revenue. Alphabet derives 77% of its revenue from ads, while Meta generates 98%.
By analyzing their operating margins, typically between 30% and 40%, we can surmise a similar range for Amazon’s ad services.
GOOGL Operating Margin (Quarterly) Data by YCharts
Assuming a conservative 30% operating margin, Amazon’s advertising services could account for an estimated $4.2 billion in operating profits, representing about 23% of its total operating profits.
Combined, ad services and AWS are estimated to represent 86% of Amazon’s operating profits in Q1. This significant share indicates how reliant Amazon is on these divisions for profitability.
While advertising budgets tend to decrease during economic downturns, Q1 growth suggests resilience, potentially aiding the division’s performance throughout the year. Furthermore, if competition from Chinese products shifts, those firms might ramp up advertising efforts, offsetting any declines.
As the year progresses, it will be essential to monitor these dynamics, but with AWS and advertising performing well, Amazon’s stock outlook remains promising.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
