Client Letters: AWS & Advertising Power Profit Growth Despite Rising Retail Inventories

The latest quarter from Amazon shows the eCommerce giant firing on all cylinders, recording one of its most profitable periods in years. Operating margins hit double digits, continuing a steady upward trend-well ahead of last year's Q3 margin of 9.5%. Here are the key highlights:

AWS Accelerates Above Expectations

Amazon Web Services (AWS) grew 20% year-over-year, outpacing consensus and adding $5.5 billion in incremental sales. AWS is capitalizing on the industry-wide shift toward cloud, with Google and Microsoft also reporting healthy gains, albeit from smaller bases.

Marketplace and Seller Services Fuel Growth

Third-Party Seller Services delivered a second consecutive quarter of double-digit growth. Since Amazon takes a referral fee from these transactions, strong 3P sales signal not just higher volume but greater pricing power.

Advertising Revenue Momentum Continues

Amazon's advertising business jumped 24% this quarter, building on last quarter's 23% growth. This surge comes as Amazon steadily grabs market share from rivals like The Trade Desk, strengthening its position as a key force in digital marketing.

Online Sales and Inventory Imbalance

Core online sales rose 10%, the second straight quarter of double-digit growth. However, inventory levels climbed even faster: up 14% this quarter and 19% in Q2. While the pace of inventory accumulation is slowing, the overhang remains. This imbalance points to elevated pricing and stepped-up vendor funding as Amazon seeks to convert heavy inventory into margin gains.

Bottom Line for Vendors and Sellers

First-Party (1P) Vendors: Amazon is using price hikes and increased vendor funding to drive profitability, even as inventories remain elevated. Inventory is up 14% year-over-year versus 10% sales growth. Going forward, expect Amazon to continue optimizing inventory and sharpening its focus on Net Product Profit Margin (Net PPM) as operating metrics improve.

Third-Party (3P) Sellers: Sustained expansion in Seller Services and Advertising underscores Amazon's pricing leverage and competitive ad platform. Cost-per-click competition remains intense, but large sellers still see Amazon as the top conversion platform, positioning it to further profit from its scale and platform dominance.

Amazon's latest results underscore its ability to grow both the top and bottom line-even as the retail landscape remains fiercely competitive and inventory levels remain in focus.

 

Please reach out if you have any questions, and thank you for your continued partnership.

Ryan Craver
Chief Strategy and Data Officer