This week's exclusive Steady Compounding Insider Stocks report reveals how Amazon's business model—built on Bezos's timeless customer principles—is positioned to thrive.

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Compound steadily,

Thomas

Jeff Bezos once shared a profound insight at the 2007 Amazon shareholder meeting:

Bezos identified three enduring customer desires:

1. Low prices,
2. Vast selection, and
3. Fast delivery

Amazon built its entire empire around these three constants. And now, 18 years later, in a world where AI threatens to reshape entire industries, Amazon’s business model remains remarkably resilient precisely because it’s anchored to these unchanging customer desires.

Doubling Down on Speed

The company continues to strengthen its ecommerce business by relentlessly optimizing its fulfillment network. Amazon has been placing inventory closer to customers through regionalization efforts, reducing transportation distances and costs. They’re also investing heavily in automation and robotics, which could reduce fulfillment processing time by 25%.

Speed of delivery isn’t just about customer satisfaction—it’s strategically expanding Amazon’s total addressable market. Faster delivery drives the everyday essentials business for products consumers traditionally get from convenience stores. It also significantly increases conversion rates.

CEO Andy Jassy revealed they haven’t yet seen diminishing returns on improving delivery speed:

The company increased same-day delivery sites by 60% in 2024, now serving over 140 metro areas globally and delivering more than 9 billion units same or next day worldwide.

The Economics of Speed

The biggest challenge for delivering fast is cost. But over the years, Amazon has become so efficient at driving down prices that UPS can no longer offer competitive rates. More and more deliveries are now fulfilled by Amazon itself. As Jassy explained:

The Flywheel Effect: 3P Sellers Drive Growth

A good indicator of Amazon’s ecosystem value is that third parties want to sell on its platform. We’ve seen third-party sales grow at a much faster clip than Amazon’s direct sales. This gives consumers much greater selection and enhances price competition—fulfilling two of Bezos’s three constants.

The numbers tell a compelling story: over the past decade, third-party seller services have exploded from just 15% of Amazon’s ecommerce revenue to a substantial 39% in 2024. This shift isn’t just about growth—it’s about superior economics.

Third-party sales deliver significantly higher margins for Amazon compared to direct sales. Even better, they dramatically improve Amazon’s working capital position since the company doesn’t need to purchase and hold inventory on its balance sheet. Instead, Amazon simply collects a commission on each transaction, along with fees for fulfillment services, advertising, and other value-added offerings.

This growth of third-party sellers benefits Amazon in multiple ways, creating a powerful flywheel effect that strengthens with each new seller that joins the platform.

Prime Membership: The Ultimate Value Stack

With this combination of selection, competitive pricing, and speed—which more than justifies the Prime membership fee of $14.99 per month or $180 per year—Amazon continues to layer on additional benefits. As Jassy explains:

The financial impact of this value-stacking strategy is stunning. Amazon’s subscription services revenue has exploded from just $2.8 billion in 2014 to a massive $44.4 billion in 2024—a 16-fold increase representing a 32% compound annual growth rate over the decade. This remarkable growth trajectory reflects both expanding membership and Amazon’s ability to gradually increase prices as they’ve added more services to the bundle.

Source: Finchat (get a 15% discount using this link)

While Amazon doesn’t explicitly disclose Prime membership numbers since 2021, research shows there are over 200 million members globally, with around 180 million in the US alone (LINK). For the sheer value Amazon Prime offers, there remains significant untapped pricing power. We’ve already seen Netflix flex its pricing muscle in recent years, with its premium subscription now standing at $24.99 per month for a single entertainment service.

Given that Amazon Prime includes not just a streaming service but same-day delivery, music, books, prescriptions, and numerous other benefits, a price increase to $20 monthly seems entirely reasonable. If Amazon were to implement such an increase for US members alone, that would generate almost a billion in pure profits. And it’s likely that same-day delivery, combined with all the other benefits mentioned above, would make Prime an even stickier product than Netflix.

The Advertising Powerhouse

The thriving ecosystem of third-party sellers and value-added services like Prime Video has given rise to a highly profitable advertising business—a key contributor to Amazon’s ecommerce profitability.

Its advertising business reached $56.2 billion in 2024, growing 20% year-over-year. Sponsored Products, where brands bid for sponsored product targeting, represents the largest portion of ad revenue, with management seeing significant runway for further growth. 2024 also marked the first year Amazon rolled out ads on Prime Video.

Source: Finchat (get a 15% discount using this link)

In the Q4 2024 earnings call, management revealed an ambitious strategy that suggests they’re directly targeting Trade Desk’s and Google DV360’s market share in the demand-side platform (DSP) space:

Amazon’s advertising strategy leverages their unique position in the market—few companies have such extensive first-party data about purchase intent and actual buying behavior. Management highlighted how they’re capitalizing on this advantage:

This comprehensive approach didn’t emerge overnight. Amazon has been methodically building these capabilities for years, working closely with advertisers to develop the tools and analytics needed. As far back as Q3 2020, SVP and CFO Brian Olsavky highlighted this focus:

A year later, Dave Fildes, Director of Investor Relations, reinforced this strategy during the Q4 2021 earnings call, emphasizing both the near-term video advertising opportunity and the longer-term DSP vision:

What’s changed recently is Amazon’s seriousness about competing beyond its own walled garden. In its earlier years, Amazon DSP wasn’t considered a major threat in the broader advertising ecosystem because of two key limitations: a clunky user interface and the restriction that advertisers could only drive traffic to products sold on Amazon. This severely limited its total addressable market and appeal to major advertisers.

However, in the past two years, Amazon has made two critical changes that signal they’re positioning DSP as a standalone competitor in the broader advertising technology landscape:

First, they’ve removed the Amazon-only restriction, now allowing advertisers to drive traffic from ads to their own websites (LINK). Second, they’ve transformed the DSP from a basic conversion tool into a sophisticated, full-funnel marketing platform with advanced targeting and attribution capabilities (LINK).

These improvements, combined with Amazon’s unparalleled shopping data and growing media properties, position the company to capture a much larger share of the digital advertising market well beyond its own ecosystem.

AWS: Growth Rebounds

Amazon Web Services has seen an impressive growth rebound after a concerning sequential revenue drop in Q1 2023 (from $21.38B to $21.35B). While a tiny decrease, it had alarmed investors who were hearing from every major player that cloud was still in its early innings with a long growth runway.

Management clarified that the slowdown occurred because they helped customers optimize workloads to reduce costs during uncertain economic times with high inflation and interest rates, sacrificing short-term growth. AWS growth rates have since inflected, reaccelerating to 18.5% in 2024 with revenues reaching $107.6 billion year-on-year.

Source: Finchat (get a 15% discount using this link)

Like Alphabet’s Google Cloud and Microsoft Azure, AWS experienced capacity constraints in Q4 2024 due to supply chain issues and power limitations affecting chip, server, and infrastructure availability. CEO Andy Jassy expects these constraints to persist until the second half of 2025:

To address these constraints, Amazon, like other hyperscalers and Meta, has developed its own custom AI silicon, Trainium2, launched at the AWS re:Invest Conference in December.

Amazon’s AI Strategy

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Amazon’s Profitability Soars

Amazon’s profitability has seen a massive uplift as it scales, showing strong signs of operating leverage even as it continues to invest heavily in AI and fulfillment centers.

Overall operating profit margins increased 440 basis points year-on-year to 10.8% in 2024. Interestingly, while AWS traditionally drove most of Amazon’s profitability, this time the rest of Amazon (ecommerce, ads, and subscription) contributed substantially to overall profit growth.

AWS operating margins surged nearly 1,000 basis points to 37% in 2024. Management notes that profitability will fluctuate in coming quarters as they invest heavily to meet demand. The company expects capex of $100 billion, primarily focused on AI. As Andy Jassy explains:

Looking beyond AWS, Amazon excluding AWS saw margins rise 290 basis points to 5.4% despite delivering more value to consumers through faster delivery, more content, and other benefits. This improvement is impressive, but I believe we’re just seeing the beginning. There remains significant untapped potential for Amazon to further monetize its massive user base, particularly through subscription and advertising revenue streams. The margin expansion we’ve seen so far likely represents just the early stages of what’s possible as these high-margin businesses continue to scale.

Valuations

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Risks

It’s not without risks of course, no investment ever is. But Amazon has built remarkable resilience against business-specific threats, even as AI threatens to cause seismic shifts across industries.

Amazon’s protection comes from its relentless focus on what Bezos identified as unchanging customer desires. Even as AI transforms how business operates, customers will always want low prices, vast selection, and fast delivery from ecommerce companies. Similarly, AWS customers will continue to prioritize reliable compute power at competitive prices—an area where Amazon has consistently excelled.

Investors seem primarily concerned about two factors: potential economic headwinds from Trump’s trade policies and Amazon’s substantial $100 billion capex planned for 2025.

Regarding economic concerns, any slowdown would certainly impact Amazon in the near term. However, with a formidable $50 billion net cash position, Amazon is positioned not just to weather a downturn but to capitalize on it. While competitors might be forced to pull back, Amazon can accelerate investments, capture additional market share, and emerge from difficult periods with an even wider competitive moat.

The $100 billion capex plan requires more careful consideration, especially given Amazon’s recent history. During the COVID-19 pandemic (primarily 2020-2021), the company significantly expanded its logistics infrastructure based on assumptions that pandemic-driven demand would persist long-term. When demand normalized faster than expected, Amazon found itself with excess capacity, resulting in operational inefficiencies and higher costs. This situation was further complicated by inflationary pressures affecting wages and fulfillment expenses, magnifying the financial impact of their overinvestment.

Could 2025’s planned investments represent another overextension? It’s possible. But the greater risk may lie in underinvesting at a critical juncture in cloud and AI infrastructure development. If Amazon were to skimp on capacity and subsequently fail to meet customer demand, it would not only lose immediate business but potentially drive both existing and prospective customers to competitors permanently.

Given AWS’s consistent growth trajectory, the expanding opportunity in AI computing, and Amazon’s exceptional financial strength, their aggressive investment posture appears strategically sound. Amazon has demonstrated that being willing to accept short-term margin pressure for long-term market leadership is a formula that ultimately rewards patient shareholders.

A portfolio adjustment

In my earlier article “My Playbook for Turning Drawdowns into Opportunities,” I mentioned that I want to make use of market dips to reposition my portfolio—to go up the quality curve.

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