Barclays: Amazon's Future Hinges On 2 Things (Hint: AWS Needs To Improve)

In a report published Tuesday, Barclays analyst Paul Vogel commented that the long-term profitability of Amazon.com, Inc. AMZN hinges on two major areas, including leveraging the growth in Amazon's 3P (third party inventory) sales and long-term margins of Amazon Web Services (AWS).

Vogel noted that Amazon's 1P (first party inventory) margins are near breakeven and are likely to stay that way over the long term, while Prime is likely to continue losing money in isolation.

Vogel also added that looking at the company's fourth-quarter print should not serve as a validation of meaningful margin gains over the next few years. The company's fourth-quarter print was a "nice improvement" from the previous few quarters, though the margins were "only modestly" better than the final quarter of 2012.

Vogel stated that he is "anxiously awaiting" the increased disclosure around AWS. The analyst argued that it is his belief that AWS loses money, and potentially more than current Street expectations – which is actually a bullish sign.

"The Amazon debate has centered on the margin profile of its core retail business," Vogel wrote. "If retail margins are actually slightly higher than expected (AWS has been a bigger drag), we believe the market will react favorably to this news. We estimate Amazon's retail business accounts for roughly $140-150 billion of Amazon's current $175 billion market cap. As such, if margins in retail are more profitable than previously believed, that should be a positive for long term value and perception."

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