Amazon is growing its gross profit at a staggering rate

Key Points
  • Amazon has added $7 billion in gross profit in the first quarter, which is more than the growth expected from the top five retailers combined, Morgan Stanley wrote in a note Monday.
  • The change is largely driven by the growth in Amazon's high-margin businesses, including AWS, advertising and Prime subscriptions.
  • Amazon's expanding growth profit gives the company more room to invest in its business and explore new areas.
Amazon CEO Jeff Bezos
Mandel Ngan | Getty Images

One of the growing trends in Amazon's business is its fattening profit margins.

In the first quarter, it had $1.6 billion in net income — more than double from last year and only the second quarter in company history to top $1 billion in profit.

That change is partly driven by the growth in Amazon's gross profit — the money left after taking out fixed costs for things such as inventory, digital contents, storage and shipping.

To illustrate this change, Morgan Stanley compared the year-over-year dollar growth in Amazon's first-quarter gross profit with what the top five retailers are collectively expected to book.

The difference is staggering: Amazon grew its gross profit by $7 billion during the first quarter. That's nearly five times as much gross profit growth as Morgan Stanley expects for the top five retailers combined.

Growing gross profits is important because it gives the company more room to invest and expand. Amazon has been expanding rapidly into new areas such as groceries (through its acquisition of Whole Foods), hardware, A.I. and health tech. It can also use this margin expansion to reinvest in its core businesses by hiring more engineers, increasing research and development and spending more on marketing.

Amazon's gross profit margin has grown steadily over the past few years. After hovering around the 30 percent range for the last two years, it hit 40 percent for the first time in the first quarter.

That's much bigger than its retail competitors. In the most recent quarter, Walmart had 25 percent gross profit margin, while Target's came in at 24 percent. Costco's was much lower at 13 percent. Morgan Stanley expects Amazon's gross margin to reach 42 percent by 2021.

Morgan Stanley pointed out in a separate note that Amazon's high-margin businesses, like AWS, advertising and Prime memberships, are the main factors behind this change. All three of those businesses are seeing accelerating growth and are estimated to have added roughly $3.5 billion in gross profits last quarter, the note said.

What's more important is that the gross profit growth proves that earlier investments by Amazon are paying off. The $7 billion in new gross profits last quarter was double what it generated a year ago.

"Amazon's return on investment stands out, as total gross profit dollars grew by two times more than first quarter of 2017," the note said.

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